Everything You Need to Know About Investing in the Facebook IPO

An exclusive interview with Nancy Miller, facebook expert and author of “The Facebook IPO Primer.”

John Nyaradi:  Hi, everyone, I’m John Nyaradi, publisher of The ETF Premium Newsletter, a financial media newsletter specializing in exchange traded funds and global markets. Today, I’m really pleased to welcome my special guest, Nancy Miller. Nancy, welcome.

Nancy Miller: John, it’s great to be here. Thanks for having me.

John Nyaradi: You’re welcome and thank you. Nancy is a freelance financial journalist. She has contributed articles to a number of publications and has been a reporter for Knight-Ridder Financial News and real estate markets reporter at USA Today.  Now she’s the author of the new e-book just out on Amazon.com, The Facebook IPO Primer: Everything you ever wanted to know about investing in the biggest internet stock offering ever.”

The Facebook IPO Primer, obviously a very timely subject, and Nancy’s book is well up on several of the business bestseller lists at Amazon.com and deservedly so.  Nancy, let’s just start with the title of the book, The Facebook IPO Primer. What do you hope people will get out of this? What was your purpose for writing it?

Nancy Miller: Well, I thought this was a great moment to write a book for the individual investor about the stock market and explain how the market for initial public offerings works through one of the greatest business stories of all time, Facebook.  I think it’s a great moment because everybody thinks they know something about Facebook, and I think a lot of people are calling their broker and saying, “Hey, how do I get some? Do I want to be in it?” And they don’t understand what it means to be part of an IPO and that, in fact, they can’t be part of it. And this book is designed to teach how IPOs work and to give some basics of to figure out if just because I use Facebook, does that mean I want to own it?

John Nyaradi: So let’s just start with the most important question everyone wants to know, is Facebook worth it?

Nancy Miller: That’s a great question, and the answer really depends on your outlook for social media and where you see Facebook fitting into that outlook. The standard answer, or the most common view, is that Facebook is worth about $100 billion, and that’s because people think that it is a leader in social media, and it has great growth potential. It’s not what it’s actually worth now in this instant. It has $3.7 billion revenue, so you know, that’s just a fraction of $100 billion. It had about a billion dollars in profits. But what people are looking at is the potential for growth.  For example, right now, average revenue from each user on Facebook is only about $4. Google (NASDAQ:GOOG) by contrast – and Google (NASDAQ:GOOG) is what most people compare Facebook to, generates about $24 per user. So people look at that and say, “At the very least, Facebook can match Google (NASDAQ:GOOG).”

John Nyaradi: So is it a good investment for people?

Facebook IPO Date Looms>>

Nancy Miller: I would say that really depends. I think it’s a very risky stock, and this gets back to the original question of what is it worth? It’s risky because high technology is moving so fast and there are disruptors appearing at every twist and turn. I think if you have some money to invest that you don’t mind losing – I mean not that anybody really likes to lose money, but that won’t really hurt you, and you believe in the story, then sure, but I think it’s a very risk investment simply because high-tech is a story that is always changing and moving.

I mean think about this. Google (NASDAQ:GOOG) has been public for only 8 years, and it has done unbelievably well. It was priced at $85 and it’s now around $600, which is pretty unbelievable. But now, everybody says Google is running scared because of Facebook and other changes in the marketplace, and what happens is the time frame between when one disruptor appears on the scene and the next one comes is shortening.

So now Facebook is the leader, but already, people were saying Instagram, which Facebook just bought for $1 billion, had the potential to push Facebook off its throne. Now see, Instagram had no revenues. They had no profits, but it had an incredibly fast-growing base of fans. So that tells you something about how quickly technology is changing, and for an investor, that means that’s a very slippery slope from being king to being dethroned.

John Nyaradi: You just mentioned Instagram and it was like the billion dollar buy-out for zero revenue for a company that has 11 people. How does that fit into the Facebook business plan? Are they going to keep buying things or shall they do it themselves? How does all that work?

Nancy Miller: Okay, well that’s great. This is part of the business plan, and part of the reason some people think they’re having the IPO, there are actually some other more important reasons, but buying Instagram was a defensive measure.

Facebook has a problem. It was started as a company for desk apps, for people to sit down at home or at their office and connect with other people, connecting being the main job of Facebook. Now, everything is moving to a mobile format, whether it’s a tablet or a smartphone, and Facebook, of course, has a mobile app, but it’s not nearly as appealing as an Instagram, which was born as a mobile app. So what Facebook was really buying with Instagram is that DNA of mobile engineering know-how.

John Nyaradi: You have divided your book into four parts, so let’s just touch on each one briefly.  In Part 1 you talk about the ups and downs of hot, high-tech stocks.

Nancy Miller: Right, and this gets to just how risky is Facebook and how you feel about it. The people who love it say it’s the next Google and then some. Google (NASDAQ:GOOG) is a great story.

But there’s another story that happened in between, which is MySpace. Now, people forget that MySpace until 2009 was bigger than Facebook and really seemed unbeatable. So what happened was NewsCorp (NASDAQ:NWSA) bought it for $580 million and then the company just went downhill for all kinds of reasons. The user experience was not as good as it could have been. It was hard to navigate, but people forget that Paul McCartney launched one of his albums on MySpace. That’s just how popular it was, but it ran into all kinds of problems, became infiltrated with viruses, and there were problems with sexual perversion populating it.

So people forget that. And then there’s Netscape, which was the Granddaddy of Internet IPOs in 1995. It made the internet accessible to you and me. Before Netscape, everybody thought the internet was just for geeks. Netscape made it accessible with a fabulous IPO priced somewhere in the 20s. It went up to about $75. It doubled. It tripled. And then AOL (NYSE:AOL) bought it and Microsoft (NASDAQ:MSFT) came in, introduced Internet Explorer, and that was the end of Netscape.

So Facebook is an interesting company because it knows about all these challenges, and its culture is imbued with the need for change and not standing still in recognition of the fact that technology is always, always changing and that if you stand still and are not looking around to figure out what’s next, you’ll be dead in the next year or two.

John Nyaradi: In Part 2 you talk about the Facebook culture and the business plan. We’ve talked about the business plan so let’s talk about the culture. What’s important to Mark Zuckerberg? Is it a friendly place? Are they good people?

Nancy Miller: Well, you know, I think the employees who work there are probably having a great time because it’s a culture that really loves ingenuity and creativity. It operates under something that’s called the hacker way, and you know, to most people, the term hacker is negative. It means someone’s hacking their way into your computer to steal your money from your bank account or just simply to annoy you and destroy all your data.

Mark Zuckerberg has taken the term hacker and said being a hacker is a great thing. We are people who put things together. We create. We destroy, destroying in a sense for creative destruction to build something new.

John Nyaradi: In Part 3 you talk about how analysts look at Facebook and its finances.

Nancy Miller: Right, and this is an important part for individual investors because I present five different ways that analysts look at Facebook.  They’ve come up with three different values; the lowest is $30 billion and the reason is because the rate of advertising is slowing, and even though the advertising fees are going up, the engagement is down.

The high end is about $150 billion and those people think this company is just at the beginning of its earning power.  Part of that is the potential for advertising growing exponentially on Facebook because you can target, you can slice and dice, you can segment. That is a very big piece of the potential for Facebook earnings.  But also, there are other things happening like Facebook credits. Facebook credits could be like Paypal (NASDAQ:EBAY). It could become an international currency.. That could be huge.

The middle ground says that it’s really very much like Google and based on the size of the IPO and where it is in terms of profits and revenues, it’s really worth about $100 billion. That is quite comfortable to where Google was eight years ago.

John Nyaradi: In Part 4, it looks like you bring in some other resources, links to other stories, blog posts.  What can readers expect to find there?

Nancy Miller: I put this part in because an educated investor is going to do much better than someone who just buy things because they have a gut feeling that it’s good or because everyone else is doing it.  You know, Peter Lynch said buy what you know, but he also said do your homework. So this link fest, as I call it, is the next level for everyone. I actually link to the registration that Facebook has filed with SEC along with some great bloggers, both well known and not so well known, so that people can really get a sense of whether they really want to be part of this IPO.

John Nyaradi: Nancy, I always like to end these discussions with sort of an open-ended question. I’d like to do this in a kind of two parts: one, regarding social media as a general concept or phenomenon, and then more specifically Facebook. So where are those two things going?  Are they fads or are they world changers?

Nancy Miller: Those are really big questions, and I’ll take out my crystal ball for you.

Social media is here to stay for sure, but the question is in what form. One of the great questions now around Facebook, in particular, and social media, in general, is how much people want to expose about themselves. What are they willing to exchange about themselves in exchange for the convenience?

And this is a very big battle. So people start off loving Facebook, but now that it’s big and it feels sometimes whimsical with its privacy policies, they aren’t in love with it anymore.

Then there all these new social media companies coming up, like Instagram, that was launched on Android a couple of weeks ago, and in the first 12 hours, it got a million users. I mean think about that. A million users in 12 hours. So that says a lot about how fickle people are.

So people are feeling a little confused about whether they love the convenience of Facebook, but hate sharing so much of themselves with Facebook, or whether they want to be in a lot of different places that are a little more private, but a little less convenient in terms of being a central clearing place for everything that you do.

So I think that is the great battle right now with social media and whether Facebook is a fad. I think fad isn’t quite the right word. I think the issue is working out how we want to connect with one another, whether we want a big open internet with lots of different ways to connect to one another. Do we want the Facebook walled garden where we’re all in one place with Mark Zuckerberg as the king, the benign ruler so to speak? I think these are issues that we’re working out right now in the marketplace.

John Nyaradi: Folks, we’ve been talking with Nancy Miller. She’s obviously an expert on Facebook and has been a journalist for many years writing for Barron’s, Knight-Ridder and USA Today. Her book, The Facebook IPO Primer, is on the Investing Bestseller list at Amazon.com. It has received great reviews there and it’s certainly a fascinating field for all of us. You can learn more about Nancy and her work and her book at the link at the bottom of this interview, and I encourage you to go there and check this out. I know I got a lot out of this conversation and from Nancy’s expertise and I’m sure you will, too. Nancy, it has been great chatting with you today. Thanks for joining us. I know we’re all looking forward to talking with you again really soon.

Nancy Miller: Thanks so much. It’s been a pleasure.

John Nyaradi is the author of The ETF Investing Premium Newsletter.

(recorded interview, edited for length and clarity)