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Article from NYTimes.

Facebook shares will be tempting to buy when they start trading on Friday. The company has hefty profit margins, a household name and a shot at becoming the primary gateway to the Internet for much of the planet.

But if history offers any lesson, average investors face steep odds if they hope to make big money in a much-hyped stock like Facebook.

Sure, Facebook could be the next Google, whose shares now trade at more than six times their offering price. But it could also suffer the fate of Zynga, Groupon, Pandora and a host of other start-ups that came out of the gate strong, then quickly fell back.

Even after Facebook supersized its offering with plans to dole out more shares to the public, most retail investors will have a hard time getting shares in the social networking company at a reasonable price in its first days of trading.

Facebook’s I.P.O. values the company at more than $104 billion. And the mania surrounding the offering means Facebook shares will almost certainly rise on the first day of trading on Friday, the so-called one-day pop that is common for Internet offerings. At either level, Facebook’s price is likely to assume a growth rate that few companies have managed to sustain.

New investors, in part, are buying their shares from current owners who are taking some of their money off the table, a sign that the easy profits may have been made. Goldman Sachs, the PayPal co-founder Peter Thiel, and the venture capital firms DST Global and Accel Partners are all selling shares in the offering.

“It is a popular company, but it is still a highly speculative stock,” said Paul Brigandi, a senior vice president with the fund manager Direxion. “Outside investors should be cautious. It doesn’t fit into everyone’s risk profile.”

For the farsighted and deep-pocketed investors who got in early, Facebook is turning out to be a blockbuster. But by the time the first shares are publicly traded, new investors will be starting at a significant disadvantage.

Following the traditional Wall Street model, Facebook shares were parceled out to a select group of investors at an offering run by the company’s bankers on Thursday evening, priced at $38 a share. But public trading will begin with an auction on the Nasdaq exchange on Friday morning that is likely to push the stock far above beyond the initial offering price.

That is what happened to Groupon last fall. Shares of the daily deals site started trading at $28, above its offering price of $20. It eventually closed the day at $26.11.

The one-day pop is common phenomenon. Over the last year, newly public technology stocks, on average, have jumped 26 percent in their first day of trading, according to data collected by Jay R. Ritter, a professor of finance and an I.P.O. expert at the University of Florida.

In many of the hottest technology stocks, the rise has been more dramatic. LinkedIn, another social networking site, surged 109 percent on its first day in May 2011, and analysts say it is not hard to imagine a similar outcome with Facebook, given the enormous interest.

Unfortunately for investors, the first-day frenzy is not often sustained. In the technology bubble of the late 1990s, dozens of companies, Pets.com and Webvan among them, soared before crashing down.

At the height of the bubble in 2000, the average technology stock rose 87 percent on its first day. Three years later, those stocks were down 59 percent from their first-day closing prices and 38 percent from their offering prices, according to Professor Ritter’s data.

The more recent crop of technology start-ups has not been much more successful in maintaining the early excitement. A Morningstar analysis of the seven most prominent technology I.P.O.’s of the last year showed that after their stock prices jumped an average of 47 percent on the first day of trading, they were down 11 percent from their offering prices a month later. Groupon is now down about 40 percent from its I.P.O. price.

“It’s usually best to wait a few weeks to let the excitement wear off,” said James Krapfel, an I.P.O. analyst at Morningstar who conducted the analysis. “Buying in the first day is not generally a good strategy for making money.”

There are, of course, a number of major exceptions to this larger trend that would seem to provide hope for Facebook. Google, for instance, started rising on its first day and almost never looked back.

Even among the success stories, though, investors often have had to go through roller coaster rides on their way up. Amazon, for instance, surged when it went public in 1997 at $18 a share. But the stock soon sputtered, and it did not reach its early highs again until over a decade later. The shares now trade near $225.

More recently, LinkedIn has been trading about 140 percent above its offering price of $45, enough to provide positive returns even for investors who bought in the initial euphoria. But those investors had to sweat out months when LinkedIn stock was significantly down.

Apple is perhaps the clearest example of the patience that can be required to cash in on technology stocks. Nearly two decades after its I.P.O. in 1980, it was still occasionally trading below its first-day closing price, and it was only in the middle of the last decade — when the company began revolutionizing the music business — that it began its swift climb toward $600.

Facebook’s prospects will ultimately depend on the company’s ability to fulfill its early promise. It has a leg up on the start-ups of the late 1990s, which had no profits and dubious business models. Last year, in the seventh year since its founding, Facebook posted $3.7 billion in revenue and $1 billion in profit.

But investors buying the stock even at the offering price are assuming enormous future growth. While stock investors are generally willing to pay about $14 for every dollar of profit from the average company in the Standard & Poor’s 500 index, people buying Facebook at the estimate I.P.O. price are paying about $100 for each dollar of profit it made in the past year.

When Google went public in 2004, investors paid a bigger premium, about $120 for each dollar of earnings. But the search company at the time was growing both its sales and profits at a faster pace than Facebook is currently.

Facebook may be able to justify those valuations if it can keep expanding its profit at the pace it did last year, a feat some analysts have said is possible. But especially after the company recently revealed that its growth rate had slowed significantly in the first quarter, the number of doubters is growing.

“Facebook, by just about any measure, is a great company,” Professor Ritter said. “That doesn’t mean that Facebook will be a great investment.”

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Article from GigaOm.

Don’t get mad at me for not finding seven stories for you to read this weekend. I have been busy with some other stuff and as a result I have not been able to spend as much time reading as I normally do. Regardless, here is an abbreviated recommendation list. Hope you enjoy them.

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Article from NYTimes.

“With a huge initial public offering on the runway, Facebook has shown that it pays to have friends. New investors will now have to decide what they are willing to pay to be friends.

The giant social network said in a filing on Wednesday that it was seeking to raise up to $5 billion through its I.P.O. Many close to the company say that Facebook is aiming for a debut that would value it between $75 billion and $100 billion.

At the top end of the range, Facebook would be far bigger than many established American companies, including Amazon, Caterpillar, Kraft Foods, Goldman Sachs and Ford Motor. Only 26 companies in the Standard & Poor’s index of 500 stocks have a market value north of $100 billion.

Already, Facebook is a formidable moneymaker. The company, which mainly sells advertising and virtual goods, recorded revenue of $3.71 billion in 2011, an 88 percent increase from the previous year. According to its filing, Facebook posted a profit of $1 billion last year.

“Facebook will have more traffic than anyone else, and they’ll have more data than anyone else,” said Kevin Landis, the portfolio manager of Firsthand Technology Value Fund, which owns shares in the privately held company. “So, unless they are impervious to learning how to monetize that data, they should be the most valuable property on the Internet, eventually.”

A lofty valuation for Facebook would evoke the grandiose ambitions of the previous Internet boom in the late 1990s. Back then, dozens of unproven companies went public at sky-high valuations but later imploded.

Investors are eyeing the current generation of Internet companies with a healthy dose of skepticism. Zynga, the online gaming company, and Groupon, the daily deals site, have both struggled to stay above their I.P.O. prices since going public late last year.

“We’ve seen thousands of investors get burned before,” said Andrew Stoltmann, a securities lawyer in Chicago. “It’s a high risk game.”

The potential payoff is also huge.

Consider Google. After its first day of trading in 2004, the search engine giant had at a market value of $27.6 billion. Since then, the stock has jumped by about 580 percent, making Google worth nearly $190 billion today.

Facebook is still a small fraction of the size of rival Google. But many analysts believe Facebook’s fortunes will rapidly multiply as advertisers direct increasingly more capital to the Web’s social hive.

Mark Zuckerberg, founder and chief executive of Facebook.

Mark Zuckerberg, a founder of Facebook and its chief executive, even sounded like his Google counterparts in the beginning. In the filing, Mr. Zuckerberg trumpeted the company’s mission to “give everyone a voice and to help transform society for the future” — not unlike Google’s plan: “don’t be evil.”

Investors are often willing to pay up for faster growth. At a market value of $100 billion, Facebook would trade at 100 times last year’s earnings. That would make the stock significantly more expensive than Google, which is currently selling at 19.6 times profits.

Newly public companies with strong growth prospects often garner high multiples. At the end of 2004, the year of its I.P.O., Google was trading at 132 times its earnings.

But investors have less expensive options for fast-growing technology companies. Apple made nearly $1 billion a week in its latest quarter, roughly the same amount Facebook earned in all of 2011. At a recent price of $456, Apple is trading for roughly 16.5 times last year’s profits.

Investors now have to try to ignore the I.P.O. hype and soberly sift through the first batch of Facebook’s financial statements to gauge the company’s potential.

Online advertising is a prime indicator. At Facebook, display ads and the like accounted for $3.15 billion of revenue in 2011, roughly 85 percent of the total. With 845 million monthly active users, advertisers now feel that Facebook has to be part of any campaign they do.

“When you have an audience that large, it’s hard not to make a lot of money from it,” said Andrew Frank, an analyst at Gartner, an industry research firm.

For all the promise of Facebook, the company is still trying to figure out how to properly extract and leverage data, while keeping its system intact and not interfering with users’ experiences. On a per-user basis, Facebook makes a small sum, roughly $1 in profit.

The relationship with Zynga will be especially important. The online game company represented 12 percent of Facebook revenue last year, according to the filing. However, estimated daily active users of Zynga games on Facebook fell in the fourth quarter, from the third quarter, the brokerage firm Sterne Agee said in a recent research note — a trend that could weigh on the social networking company.

Facebook also faces intense competition for advertising dollars, something it acknowledges in the “risk factors” section of its I.P.O. filing. While advertisers will likely choose to be on both Facebook and Google, they will inevitably compare results they get from both. Some analysts think Google may have the edge in such a competition.

Google users tend to be looking for something specific. This makes it easier for advertisers to direct their ads at potential customers, analysts say. “Visually, Facebook ads are eye-catching, but in terms of accuracy of targeting, they are not even close to Google’s ads,” said Nate Elliott, an analyst at Forrester Research. “A lot of the companies we talk to are finding it very hard to succeed on Facebook.”

However, the high level of interaction on Facebook could prove valuable to advertisers. “At Facebook, you are looking at people’s interests, and what they are sharing,” said Gerry Graf, chief creative officer at Barton F. Graf 9000, an advertising agency in New York that has used Facebook for clients. If Facebook becomes a place where people recommend, share and buy a large share of their music and movies, such a business could generate large amounts of advertising revenue, as well as any user fees.

“Facebook has become the biggest distribution platform on the Web,” said Daniel Ek, the founder of Spotify, a service that accepts only Facebook users.”

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Article from SFGate.

“Facebook has sold about $6.6 million worth of its shares to the investment fund GSV Capital Corp. as the company is believed to be preparing for an initial public offering next year.

GSV said Monday that it had purchased 225,000 shares in the world’s most popular social network at an average price of $29.28 per share. The investment makes up about 15 percent of the publicly traded fund’s total portfolio.

On its website, GSV describes itself as a way for its investors to access “dynamic and rapidly growing” companies ahead of their IPOs.

The investment fund did not say how large its stake in Facebook is, compared with the company’s overall ownership, and did not offer clues to the overall valuation of the social network.

A $500 million investment in the Palo Alto company by Goldman Sachs and Digital Sky Technologies in January valued the company at $50 billion, though some anticipate the IPO will push the company to a valuation of as much as $100 billion.”

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Here is some interesting ideas from SF Chronicle.

“Founded in February 2004, Facebook, Inc., the company behind the social networking website of the same name, is a privately held company in Palo Alto, California. While you may think that only qualified investors who have a net worth of at least $1 million have an opportunity to buy private company shares, investing in companies and funds that are closely aligned with and/or associates of Facebook, is actually a viable option.

The Nielsen Company
As said by John Burbank, CEO of The Nielsen Company (online division), a successful research marketing business that offers trade information to global marketers, “Facebook is an increasingly vital link between consumers and brands.”

Thus, it was only natural for the two companies to form a strategic alliance in order to determine important statistics to meet business goals, such as increasing Facebook’s advertising profits.

While Nielsen is privately held, contact their Investor Relations team, easily accessible on their site, for information on their 2009 investment results and additional information.

Microsoft (Nasdaq: MSFT)
Not only does Microsoft have a 1.6% stake in Facebook ($240 million), they have also extended their relationship globally and are Facebook’s current ad-serving partner, having the right to sell advertising directly on Facebook, while providing full access to Bing search characteristics.

Bing’s search engine provides a substitute for Google’s (Nasdaq: GOOG) after Microsoft beat out Google to claim a stake in Facebook. According to Bing General Manager Jon Tinter, “Bing will continue to exclusively power the web search results on Facebook.” This partnership continues to aid in Facebook’s traffic growth.

Additionally, since the majority of Microsoft’s business is the development and sale of unrelated software products, if Facebook’s market value results in a drastic change, it would have only a modest impact on Microsoft’s share price. Investing in Microsoft shares might be a safe option to play.

Retail Companies
Retail companies have successfully marketed and advertised through Facebook. According to a 2008 Rosetta study, 59% of 100 popular retailers developed Facebook pages to advertise their brands. Facebook pages bring customers that may not have been aware of the companies without it. Additionally, it is easy to update, appears in search engines, and accepts live feeds from blog pages.

Well-reputed retail companies that use Facebook to advertise and also have public stock options include Saks Fifth Avenue (NYSE: SKS), Wal-Mart (NYSE: WMT), J.Crew (NYSE: JCG), Gymboree (Nasdaq: GYMB), Nordstrom (NYSE: JWN) and many others. (What people buy and where they shop can provide valuable information about the economy. Lear more in Using Consumer Spending As A Market Indicator.)

SharesPost
SharesPost is a private equity market; it shows available company stock and completed deals, gives estimates on the worth of private companies, spots which companies are backed by venture capital, and promotes trading.

Chief Executive Greg Brogger says SharesPost “…facilitat[es] the sale of equities in companies that have not been able to unlock their stock value because the initial public offering (IPO) market has virtually shut down.” SharesPost boasts private shares and currently values Facebook at almost $12 billion.

Invest in Facebook’s Competitors
Although Facebook is reportedly the number one social media service, competition still exists presently and possibly in the future. Similar companies, such as Myspace.com, are publicly owned.

Buying a share in a competitor follows the logic that an increase in the social media market could quite potentially raise the market for all competitors in the industry. When investing in social media, pick those with a known record of increasing sales and profit.

Look Out for a Facebook IPO
There is the possibility that Facebook might have a future IPO, which would make it one of the biggest in recent memory. The current value of Facebook has been estimated at $11.5 billion, but if it goes public, the company is projected to be worth more than twice that. As Zuckerberg told The Wall Street Journal: “We’re going to go public eventually, because that’s the contract that we have with our investors and our employees.”

Some say Facebook’s postponement of an IPO helps to evade the associated hassles, including investor analysts, shareholders and stakeholders, and the media. But Facebook does not need the money. According to Zuckerberg, “if you don’t need that capital, then all the pressures are different, and the motivations [to go public] are not there in the same way.””
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Here is an article from The Big Money.

“That’s not the frame of this insightful Wall Street Journal story, but it could be. Journal reporter Ben Worthen flags the widening gap between cash-rich tech companies—Cisco (CSCO), Microsoft (MSFT), Apple (AAPL), Google (GOOG), and Oracle (ORCL)—and everybody else. By keeping tens of billions of cash on their balance sheets, Worthen writes, “these companies can afford to take risks that smaller companies can’t at a time when the economy remains fragile.”

This notion is so far outside of conventional wisdom that it can’t even get in the same room. For decades we’ve been told that the nimble startup would run circles around the corporate dinosaur. But Worthen’s piece is a great reminder that a crucial way for companies to obtain and maintain their advantage in rapidly developing fields is through acquisition. And in order to make the right acquisitions, you need currency (cash is best, but stock is also a valid currency under the right conditions).

This issue is too often ignored in discussions of a Facebook IPO, which the company’s investors have publicly ruled out for 2010. There is a line of thinking that says that Facebook is already flush with cash, and since it is now cash-flow positive, it ought to be able to stay that way. Other tech startups, too, argue that open-source technology and cloud computing keep their costs substantially lower than those of their ‘90s counterparts and therefore they don’t need to go public.”

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