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FEATURE I SATURDAY, MAY 12, 2012

Mad About Facebook!

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By ANDREW BARY I MOREARTICLES BYAUTHORInvestor frenzy continues to grow, with the IPOimminent. But those who climb aboard now may be settingthemselves upfor disappointment.

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Print I I Reprints I I ~mail I I 2 IDDFacebook frenzy is building ahead of the mostly eagerly awaited initial public offer ingever. The eight-year-old social-networking powerhouse is set to offer as many as 388million shares this week in a $28 to $35 price range. Assuming a price at the top of thatrange, the deal will value the company at nearly $100 billion and raise $13 billion, makingit the third-largest domestic IPO behind only those of Visa (ticker: V) in 2008 andGeneral Motors (GM) in 2010. Facebook will trade on Nasdaq under the symbol FE.The wild scene in midtown Manhattan last Monday when the company held its roadshowwas a testament to Facebookfever. More than 500 institutional investors waited a half-hour or more to get into a hotel ballroom for a thin presentation that included a stale 30-minute video that already was on the Facebook site, and the man everyone came to see,CEO MarkZuckerberg, offered few comments and little of substance.Still, the buzz is that Facebookis a must-own, or certainly must-look-at, for growth-stockmanagers because of its lofty market value and its immense potential, given a user base of901 million, or 58% of the globe's Internet users (not including China, where the site isrestricted).

L_----J~D:;;;avid Paul Morris/Bloomberg NewsMark Zuckerberg has c rea ted a t rul y g rea t company .But that doesn't mean Facebook will be a gr eat st ock.

Despite all the excitement, investors woulddo well to skip the deal. Facebook's shareswill be richly priced, both in absoluteterms and relative to the stocks ofestablished growth companies Google(GOOG) and Apple (AAPL), as Barron'sargued in February when Facebook filedfor its IPO ("AtLong Last Facebook,"Feb. 6).If the deal is priced at $35, Facebook willbe valued at around 70 times projected

2012 earnings of 50 cents a share and 18 times estimated revenue of $5 billion.

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In contrast, Google, at $610, trades for less than 15 t imes 2012 profit estimates and undersix times revenue. At $570, Apple shares have a 2012 PI E of just 12 and the company'ssales have been growing more rapidly than Facebook's despite a revenue base that is 40times larger. The effective PIEs on Google and Apple are even lower when factoring intheir huge cash hoards. Facebookalso will have plenty of cash-an estimated $9 billion-

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Mad About Facebook! _ Barrons.comhe will call all the major shots because ofhis complete control. Zuckerberg will own503 million shares after the IPO. Hisholding of super-voting stock with 10votes, compared with one vote for publicshares, wil l give him 32% voting control.Factor in his voting proxy for another 466mill ion shares and the 28-year-oldentrepreneur will control 61% of the votes.

Fia~.;cbtlOk R~~ifIi.i~:i; ; i r id ' MC I i . 't l i ly U:ii~r:ii. .~ $ipj~ . . ,"I like Zuckerberg. He's not full of himselflike some other tech CEOs, and he's notdistracted by wealth. I don't think he will

be ordering a 757 for himself," says Fred Hickey, the editor of the High-Tech Strategistnewsletter and a member of the Barron's Roundtable. Google co-founders Sergey Brinand Larry Page caused a stir when they bought a Boeing 757 in 2007, the year thatincidentally marked the peak for Google shares. Hickey says the Facebook platform "isreally good. The question is whether this focused and bright guy can monetize it."

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THE BULL CASE ASSUMES Facebook will find a way to monetize its enormous andengaged user base of over 900 million with various forms of advertising and otherservices. In an April report, Bernstein analyst Car los Kirjner noted that Facebookgenerated $3.2 billion of ad revenue last year, less than 10% of all Internet displayadvertising. This suggests an opportunity for Facebook to capture a greater share of agrowing pie as advertisers continue to move spending away from traditional media."The investment thesis is pretty simple. Facebookknows more things about more peoplethan does Google, and those people have stronger emotional connections and loyaltybecause that's where their friends are," says Kevin Landis, chief investment officer atFirsthand Capital, a Facebookholder. "So given a few years to figure it out, Facebookcould end up being worth more than Google, which has a market value of $ 200 billion."Facebook likely will end up in the benchmark S&P 500 index. How soon? Google enteredthe S&P in 2006, some 19 months after its IPO. The key requirement for Facebook tomeet is based on the public float in its shares, which S&P needs to see above 50%. Afterthe IPO, the Facebookfloat is expected to be about 15%. That figure will rise as lockuprestrictions are lifted in the next six months.Several analysts came out with bullish reports on Facebooklast week, with target prices ashigh as $44. Kirjner's April report didn't have any specific price target or profit estimates,but he figured the core business was worth $60 billion to $100 billion, with another $50billion for potential future opportunities stemming from what he calls its "rich data setand the engagement of its nearly one billion users." This could involve electronicpayments, banking, credit, games, and entertainment, he wrote.

Among the many Facebook-targeted adopportunities is its ability to connect anadvertiser with the nearly 100,000 womenin the New York City area who are engagedto be married, or the 36,000 single menaged 18 to 35 nationally who have

indicated that they like skydiving, says Bernstein 's Kirjner.

The Bottom LineInvestors hoping for runaway gains f romFacebook could be sorely disappointed.Earnings must grow six-fold, to $3 a share,to support a double from the stock's likely$35 IPO price.

This kind of precise targeting-enabled by user-generated information-represents one ofthe most powerful arguments for Facebook, yet some ad buyers have expresseddisappointment with Facebook campaigns, and the company faces the challenge of notalienating users by bombarding them with ads. Kirjner last week put out a research notespelling out some important questions for management. The first was: "Why haven'tadvertisers shifted more of their budgets to Facebookfaster?"ZUCKERBERG HAS CREATED an incredible company in less than a decade, but greatbusinesses aren't always great stocks if pricing is too high. "To make it a great investment,a lot of things have to break investors' way," says Steve Weinstein, senior Internet analystat ITG Investment Research in San Francisco.

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At $35, Facebookshares could already be discounting $15 billion in annual ad revenues inine.barrons.com/ article/SB5000 14240 531119043 70004 5773 963 202 75 20665 2.html?mod =BOL_twm ...

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Mad About Facebook! _ Barrons.coma few years and $1.50 to $2 a share in profits. Adoubling in Facebook's market value mayrequire $30 billion or more of revenue by 2017, five to six times what the company isexpected to generate this year. Those revenues could produce $3 a share in earningspower and support a $70 stock.Will Facebook be held to a higher standard, like Google, whose shares are down from their2007 peak despite sharply higher profits and revenues as investors worry about growthprospects? Or will it be treated more like Amazon. com, which seems to get a pass, quarterafter quarter, on producing sizable earnings as investor gush over its revenue growth andfuture opportunities? Facebook's future share price may depend exactly on that.Better bets probably are Apple and Google, proven growth companies with much lowervaluations and cash-laden balance sheets. Connect with your friends on Facebook. Stayaway from the stock.

Facebook Versus Other Growth StocksIf Facebook goes public this week at $35 a share, it would be valued at almost 70 timesprojected 2012 prof its, a big premium to proven growth stocks Google and Apple.

Recent 2012 E 2012 E Market Net Cash 2012 ECompany fTicker Price EPS PfE Val (bill (bill Rev (billFacebook /FB* $35 .00 $0.51 67 $95 $9.0 $5.2Apple /AAPL 570.52 47.01 12 532 110.2 162.0Google /GOOG 613.66 43.42 14 200 44.7 35.0Amazon.com /AMZN 226.69 3.05 74 103 3.4 63.0LinkedIn /LNKD 111.00 0.68 163 11 0.6 0.9Groupon /GRPN 9.87 0.20 49 6 1.1 2.3E=Estimate *Price at the high end of IPO range. AAPLhas a Sept. fiscal year. GOOG andAMZNearnings exclude stock-based compensation expenses.Sources: Company reports; ThomsonReuters

Deal IPO 1st Day Recent IPO toCompany fTicker IPO Date Size (bill Price Close Price Recent PriceVisa /V 3/18/2008 $17.9 $44 $56.50 $118.17 168.6%General Motors /GM 11/17/2010 15.8 33 34.19 22.37 -32.2Facebook /FB 5/17/2012 13.6 35 N/A N/A N/AKraft /KFT 6/11/2001 8.7 31 31.25 39.06 26.0United Parcel/UPS 11/9/1999 5.5 50 68.25 76.61 53.2N/A=Not ApplicableSources: Bloomberg; S&PCapital IQ

MARK VEVERKA and TIERNAN RAY contributed to this article.

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