A Leap of Faith: Facebook
This article is part of our Leap of Faith series, in which Foolish writers each pick a stock to take a chance on for the long term.
When Facebook announced its IPO earlier this month, a lot of investors expressed a lot of skepticism -- but this being Leap Day, I'm ready to make a leap of faith. I'm ready to buy the soon-to-come Facebook IPO.
But not without some trepidation.
Overpriced on its face
If there's one objection to the Facebook IPO that rings out loud and clear among its detractors, it's the price. Though it's rumored to cost anywhere from $75 billion to $125 billion, depending on whom you ask, most pundits default to the nice, round figure of a $100 billion presumed valuation for Facebook on IPO day. Even Facebook itself seems to be playing to the crowd. When its prospectus came out, the company named the improbably round "$1 billion" as its figure for calculated "net profit" earned in 2011.
In other words, Facebook is basically shouting to the world: Yeah, we're worth 100 times earnings. Deal with it.
Other numbers seem similarly brazen. With $3.7 billion in trailing revenues, Facebook aims to claim a valuation of 27 times annual revenue. Its $943 million in trailing free cash flow implies a price-to-FCF ratio of 106. Measured against pretty much any financial yardstick available, Facebook looks horribly, frighteningly expensive. Yet what do you get for spending all this money on Facebook?
It's hard to say. The epitome of a virtual company, Facebook doesn't really make anything essential to life as we know it. Food? Clothing? Shelter? It doesn't provide a one of 'em. Other social networking services, such as LinkedIn (NAS: LNKD) , at least provide a valuable service in helping people to get a job... resulting in a paycheck... which can be parlayed into the aforementioned food, clothing, and shelter.
Yet strangely, you can argue that LinkedIn itself is cheaper than Facebook, selling for just 17 times sales (albeit for a pricier 825 times earnings). And all Facebook seems to do, really, is satisfy the human need to waste time on the Internet.
...or virtually everything?
Scoff if you like, but this does appear to be a need that requires satisfying. Just a few years into its short time on this Earth, Facebook already claims nearly half the population of the United States as its subscribers. Globally, the "Facebook nation" boasts a population bigger than that of the entire United States. Seems to me there's something more significant going on here than mere time-wasting.
In fact, I'd go so far as to argue that if Facebook were to disappear from the planet tomorrow, it would be sorely missed. The service arguably helped spark the Tunisian and Egyptian revolutions, and catalyzed real change across the Arab world last year. How many other companies out there can say -- really and truly -- that they changed the world in a manner as significant as Facebook has?
You say you (don't) want a revolution?
Revolutions aside, Facebook's intertwined itself into the fabric of our world on many levels. First "turned on" to the service just a couple of years ago, I've personally reconnected through Facebook with friends whom I lost touch with decades past -- and I don't know of another service out there that replicates that service. (Sorry, Google+. I know you're trying, but it's still a vast wasteland out there.) And across the service's 483 million daily active users, millions and millions of other Facebook members will tell you the same.
And Facebook isn't stopping with just reconnecting penpals... or reshaping global governments. In recent months, I've noticed more and more that when I start to log on to a website -- websites often having nothing to do with Facebook proper, mind you -- I'm being asked to "connect with Facebook."
For example, Groupon (NAS: GRPN) and The Washington Post (NYS: WPO) have both begun using Facebook as a sort of international Internet passport to log on to their sites. It's as if the idea that Microsoft (NAS: MSFT) first came up with for Passport, and that Google (NAS: GOOG) is still trying to do with Wallet, Facebook has already put into practice.
But where Microsoft failed, and Google is still uncertain of succeeding, Facebook seems to have found a way to insinuate itself as a universal intermediary. It's persuaded companies that could, by rights, consider themselves its competitors to instead invite Facebook in and make it part of the team.
Facebook: A once-in-four-years opportunity
Make no mistake: Facebook critics are right to be skeptical of the company's valuation. In any other company, a 100 P/E ratio would send me fleeing for the hills, and far away from the stock. But the more I watch Facebook evolve, co-opting the competition and changing the world in the process, the more I'm convinced that it's not just "any other company."
So do I know what other tricks Facebook has up its sleeve? No. Am I certain the company will keep doubling its revenue stream, and its profits, year after year after year, so as to justify the enormous price tag the stock is sure to fetch on IPO day? No.
That's why investing in Facebook is a leap of faith. And while I don't intend to go investing in 100 P/E companies every year, this year -- Leap Year -- I will.
Buying an overpriced IPO like Facebook may not be the smartest move for everyone. If you decide Facebook isn't for you, perhaps you'd be more interested in learning whichstocks only the smartest investors are buying?Find outhere.
See what other stocks are getting our Foolish writers to swing for the fences; click back to the series intro for links to the entire series.
At the time this article was published Fool contributorRich Smithdoes not own (or short) shares of any company named above.The Motley Foolhas adisclosure policy.The Motley Fool owns shares of LinkedIn, Microsoft, and Google.Motley Fool newsletter serviceshave recommended buying shares of Microsoft, LinkedIn, and Google.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Microsoft.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.
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