Facebook, Jobs (Not Steve) and Accidental Investing

Weekly Market Commentary 2-6-11

Tim Phillips, CEO Phillips and Company

Is Facebook worth it? Without a doubt, this will be the biggest question we get asked as advisors over the coming weeks. So, could investing in Facebook once it becomes publically traded be the path to fortune or could it be another version of “accidental investing” like the recent commercials suggest?

When Facebook does have its IPO, it is expected to be valued between $75 and $100 billion. On their S-1 filings with the SEC, Facebook had reported revenues of $3.7 billion and earned $1 billion in profit last year. Based on these numbers, Facebook would have a price-to-earnings ratio (P/E) of 75 to 100 and a price-to-sales ratio (P/S) of 20 to 27!

revenue and valuation and pe

In comparison to other tech titans, Facebook’s valuation might be considered rich:

PE from various companies

The difference between Facebook and the other tech titans is their growth rate. Facebook’s revenue grew by 88% in 2011, while Apple, Google, and General Electric’s revenue grew by 68%, 29%, and -1.5% respectively.

Facebook boasts that 1/8th of the world population are currently active users. However, this may mean Facebook’s user growth could start slowing simply because everybody who might join Facebook has already done so. Looking at the ad revenue growth numbers in 2011, we see growth of 18% in Q4, 3% in Q3, 22% in Q2, and -3% in Q1!

So what's Facebook actually worth? I’ll let the market decide the final number. Personally, I think a $60 billion valuation would be more attractive. If I succumb to “accidental investing” I might gravitate towards the $75 billion valuation. If I do, then I’ll certainly be much more cautious as I over pay.

Jobs, but not Steve.

Just to keep with our Facebook theme, I took a look at how many people our comparative company’s employ:

  • Google has approximately 32,000
  • Apple has approximately 63,000
  • Facebook has approximately 3,200
  • GE has approximately 287,000

From this fragment of data, the new economy appears to make more value and less employment.

With that piece of antidotal evidence in mind, we did have a great job's report last Friday. Job growth was widespread with large gains in professional and business services, leisure and hospitality, and manufacturing.

  • Professional services added 70,000 jobs.
  • Manufacturers added 50,000
  • Leisure/hospitality payrolls increased by 44,000.
  • Retailers added 11,000

There is no other way to put this jobs number other than a possible sign of a stronger consumer. The only downside is the employment participation rate dropped to 63.7%, the lowest rate since the early 80’s.

If Facebook represents the next generation of companies, then new companies look more like wealth creators than job creators. With Facebook being valued at near levels with the likes of Boeing, Caterpillar, McDonalds, and Cisco, yet only creating a few thousand jobs; the real winner will be the wealth effect not the employment effect.

Perhaps it's time to put more inflation hedges into the portfolio and add more risk into your holdings. Just don't be caught “accidentally investing.”

If you have questions or comments please let us know as we always appreciate your feedback. You can get in touch with us via Twitter, Facebook, or you can Email me directly.

Tim Phillips, CEO – Phillips & Company

Research Provided by:
Adam Gulledge, Associate – Phillips & Company