FACEBOOK FACE-OFF: IPO presents rare opportunity to prosper from ingenuity of a tech visionary

5/18/2012

EDITOR'S NOTE — Facebook begins selling stock to the public Friday in the most talked-about market debut in years. Two Associated Press business writers are debating whether the stock is a smart buy.

SAN FRANCISCO— I doubted Mark Zuckerberg when I met him more than five years ago, shortly after he rebuffed several chances to sell Facebook for what was a fortune even then.

He seemed confident to the point of being cocky about his ability to turn what started as an online hangout for college students into a digital commune for the entire world. Facebook had about 20 million users at the time.

While listening to Zuckerberg pontificate on Facebook's potential to become a more important communication channel than long-established media outlets, I wondered whether this then-22-year-old kid was deluded.

Had he screwed up by not accepting one of those buyout bids ranging from $800 million to $1.5 billion that were dangled before him during 2005 and 2006?

Clearly not. Now I think investors who don't buy some Facebook stock within the next month will regret it in five years, when the Internet's largest social network will have more users than the population of China.

As it is, Facebook has more than 900 million users and will have an initial market value of $104 billion — more than twice as much as the combined value of two former suitors, Yahoo and Viacom.

Zuckerberg, who turned 28 on Monday, pulled off the initial public offering just eight years after starting Facebook in his Harvard dorm room. Just imagine what he might be able to accomplish by the time he turns 35, now that Facebook has raised $6.8 billion in its IPO.

But don't wait too long to find out. At some point in the next few days or weeks, seize on the IPO as a rare opportunity to prosper from the ingenuity of a headstrong visionary in the mold of Apple's Steve Jobs, Microsoft's Bill Gates and Google's Larry Page and Sergey Brin.

There is one difference: None of them was named Time magazine's person of the year in his mid-20s, as Zuckerberg was in 2010.

Apple, Microsoft and Google, of course, all changed the world with their innovations and built steadily growing businesses that enriched investors. Collectively, the three technology titans have created more than $1 trillion in shareholder wealth since their respective IPOs.

The returns on a post-IPO investment in Facebook aren't likely to be as big because the company is starting with such a lofty valuation. Apple debuted with a market value of less than $2 billion in 1980, while Microsoft took its bow in 1986 with a market value of less than $1 billion.

More recently, Google had a market value of nearly $25 billion in 2004 when mainstream investors got their first chance to buy stock in the Internet search leader.

Just because Facebook's upside isn't as great doesn't mean it can't be a great investment. The chances of Facebook's stock doubling or tripling during the next five years look promising, given that the company is sitting on a gold mine of personal data prized by advertisers looking to sell products and services to the people most likely to buy them.

It's an advantage that Google also enjoyed as it figured out how to match ads with the preferences signaled by Internet search requests. Google's market value surpassed $200 billion less than 3½ years after its IPO, and Facebook knows even more about its users' preferences because it doesn't have to make educated guesses about them. Facebook users explicitly tell the company by pressing "like" buttons all over the Web and sharing revealing details about their lives in status updates.

The trickiest part about Facebook's IPO is deciding when to buy some shares. It's probably unwise to invest Friday, when Facebook's shares will begin trading amid a delirious fervor likely to inflate the stock price, at least temporarily.

Consider what happened after last year's IPO of LinkedIn, an online professional networking service that is probably the closest thing Wall Street has seen to Facebook's social network.

LinkedIn's shares rocketed from $45 in its IPO pricing to $122.70 within the first few hours of trading. A year later, the stock hasn't touched that price again. But a month after the IPO, patient investors were able to snap up LinkedIn's shares for under $64. The stock has bounced back above $100, now that LinkedIn has proved it can be more profitable than analysts anticipated.

Skeptics believe LinkedIn is grossly overvalued, just as the doubters are harrumphing about Facebook.

Both companies are expensive by traditional benchmarks. LinkedIn trades at about 12 times its projected revenue this year, while Facebook is going for 20 times its projected 2012 revenue, based on its IPO price of $38. Google, by comparison, is trading at about six times its projected revenue for this year.

But Facebook hasn't been as aggressive as it could have been about selling ads or finding other ways to make money where its visitors, on average, dwell for an average of 6½ hours per month, according to comScore Inc. Instead of ramping up revenue, Facebook has concentrated on attracting users — an emphasis that is bound to pay off.

One of the main reasons Facebook is likely to figure this all out is that Zuckerberg hired Sheryl Sandberg as the company's chief operating officer in 2008. Sandberg played a key role in expanding Google's advertising system during its first few years as a publicly held company, a period when the company's stock hit its peak so far. Sandberg brought not only her own expertise to Facebook but also hundreds of other former Google employees who defected to the social network in search of the next big thing.

They found it, and it's still not too late to get a piece of the action.