Psst! What if Facebook Is Actually Cheap?


Underwriters raised the price range of Facebook's IPO last night.


Instead of the earlier deal that valued the leading social networking website operator between $77 billion and $96 billion, buyers will be shelling out between $34 to $38 for every share of Facebook they covet. If it prices at the high end, which is more than likely at this point, we're looking at a $104 billion company before ordinary investors like you and me get a crack at it in the open market on Friday.

Let me tell you how nearly every analyst and financial media watcher expects this to play out.

Facebook will price at $38 on Thursday night, and possibly closer to $40 or $42. Despite going public at a market cap well above $100 billion, the stock will pop higher for the first wave of public buyers shortly after Friday's opening bell. Whether it hits $50 or $60 -- anything short of the low $70s where it bumps up against the substantially larger Google's (NAS: GOOG) market cap seems plausible -- the stock will burn nearly every poor sap that places a market order on Friday.

In a few weeks or perhaps months, Facebook will give back all of those gains. It will be a busted IPO, and the subsequent sell-off in overvalued dot-coms will leave financial historians calling this the Facebook bubble.

Click the "Rec This" button at the top of this article if you agree.

Ha -- made you click
I tricked you. I'm sorry. The rest of this article is devoted to the reasons why the prevailing mindset I just detailed will be wrong. And, unlike Facebook, there apparently isn't a way to "UnRec" our "Rec This" button.

Don't hate me. Just take this time to be a contrarian, unlike the boatload of Facebook IPO bashers that believe that they are the ones being contrarian. They're not. Well, at least not this time.

It's easy to predict that Facebook will pop higher at the open. It's even easier to predict that Facebook will be a busted IPO this summer. We've had plenty of leading Internet companies go public over the past year, only to come crashing down.




Groupon (NAS: GRPN)




Zynga (NAS: ZNGA)




Pandora (NYS: P)




Source: Yahoo! Finance.

All three companies are the top dogs in their respective areas of specialty. Groupon and Zynga can even tie their rapid success to the popularity of Facebook. Groupon became popular through the viral nature of folks posting the local deals they scored on Facebook (because Groupon promises the deal is free if the person can get three more to follow suit). Zynga's social games took advantage of Facebook opening its door for third-party apps, and now accounts for 15% of Facebook's revenue.

However, none of those companies are Facebook. Groupon and Pandora are just now breaking into spotty profitability. Zynga is merely the trendy store in the world's busiest mall. Given the fickle nature of social gaming, the smarter bet is on the mall landlord itself -- and that's Facebook.

Tomorrow's earnings won't come from yesterday's ads
A common knock on Facebook is that online advertising doesn't work on the site. Facebook may now have more than 900 million active users, but only a handful of them are stupid enough to click on the shady ads promising snoring cures or killer abs.

Search marketing manager WordStream pitted Facebook against Google, finding that just 0.051% of Facebook ads received clicks for advertisers. Google, on the other hand, checked in with a 0.4% click-through rate.

This isn't a surprise. Folks are on Google because they want to go somewhere else. The search engine fails if you're on the site for more than a few page views. Facebook users can be on the site for hours at a time. In other words, Facebook advertising is more along the lines of television consumption. Google is a phone book.

Do you think that things will always be that way?

A Nielsen "State of the Media" report late last year revealed that Facebook users are 12% more likely to shop online than folks who don't participate in social networking website. That makes sense. Folks who trust sharing personal information with acquaintances have an easier time trusting online merchants.

Facebook generated an operating profit of $1.7 billion on $3.7 billion in revenue last year, and that's with crummy ads. What happens when Facebook actually breaks a sweat and tries to monetize its traffic effectively?

I've only clicked on one Facebook ad over the past few years, as far as I can recall. A local restaurant that I had never heard of was opening a Rodizio-style restaurant for pizza. I was intrigued. I clicked. As more local advertisers flock to Facebook -- and ads become less about improving credit scores and more about things around me that jibe with my interests -- just imagine how meaty Facebook's growth will be?

Selling Facebook short
Don't underestimate the power of 901 million users, with more than half of them checking the site daily. Don't sell short the 3.2 billion comments and likes that Facebook collects daily. Do you really think this is a fad?

Educated analysts and seasoned investors will laugh at the unsophisticated noobs giddily paying $57.85 for a share of Facebook later this week. They laugh because they know how to value a company's past, and using that base to discount the future. However, the simpleton getting a market order filled on Friday afternoon may be just as good at nailing where Facebook's model will be in the future as the skeptics. Since there has never been a site as popular and sticky as Facebook, assumptions are dangerous on both ends of the euphoria spectrum.

Keep that in mind when Facebook emerges -- in years if not months -- with the last laugh.

A world of opportunity
Facebook has taken the world by storm, but a new report reveals three more American companies ready to dominate the world. It's a free read, so what are you waiting for? Check it out now.

At the time thisarticle was published Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.The Motley Fool owns shares of Google.Motley Fool newsletter serviceshave recommended buying shares of Google. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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