My history with Facebook goes back to 2006 when I joined the service, then 2007 when I first visited their HQ in Palo Alto and wrote that I was so impressed with the company that I thought it would be worth over $10bn.  That number that sounded so crazy then is but a fraction of its vaue today.  And then a year later I helped Mark Zuckerberg launch Facebook in Spanish. Here’s a video of the two of us. Needless to say that Mark Zuckerberg is an absolute genius when it gets to build THE social network.

Still I did not buy Facebook shares in the IPO.  I should clarify that I am a long term investor, not a trader but $38 seemed to high a valuation for me.  I was waiting for the shares to come down.

Before the earnings announcement I had bought some Facebook shares at $28 and a few hours ago I bought more shares at $23. And I have another order to buy more if they get to $20.

Here’s my rational.

Image representing Mark Zuckerberg as depicted...

Image via CrunchBase

Facebook is an amazing company, it has a good chunk of the richest segment of humanity glued to its service. The share of global income of people with Facebook accounts must be, in my view, at least half of all global income.  Not only do they have a billion users but they have the billion with the most money.  The top billion.

That Facebook is so great at engagement but so bad at monetization sounds to me as a more solvable problem than the exact opposite and that’s why I am buying the shares.

Right now Facebook seems to get $2 per user per quarter. I can’t believe they are not going to be able to get double that in the near future. If Google owned FB, how much would they get out of its user base? Google gets over $40bn in revenues from its user base now but its users and time on site are comparable to FB. So a good guess could be that FB could get 10X more revenues from their user base when they grow up.

Risks? that they never get good at monetization and/or that somebody else “myspaces” them.  That’s why I only recommend owning at most 3% of your net worth in Facebook shares. My main holdings are Apple, Google and Amazon and my portfolio exposure to Facebook is very small. But now I am a shareholder.

Follow Martin Varsavsky on Twitter: twitter.com/martinvars

No Comments

Gregoire on July 27, 2012  · 

Martin, thanks for sharing your interesting logic.
I think even doubling revenue to lets say 2bn per quarter with current cost of revenue does not justify such a high valuation, no?
Also i feel that more and more people ‘dislike’ fb, they only keep using it because there is no real alternative yet. this seems to increase the chance to get myspaced.

Mark on July 28, 2012  · 

Novice question. Where can a novice go with, say €500 or €1,000 to make a purchase of FB shares without having a large % taken in transaction fees, etc? Thank you.

Jose on July 29, 2012  · 

It is a very valid argument. The way I see the things is different through.

I believe Facebook is a pyramid scheme. The people that get early in the game make a lot of money from the people that come later. Today the only significant transfer of money is from the base of the pyramid to the top, not from the market. IMHO any company that makes money just from their investors is in bad shape.

FB offers a great service at $0 cost, well not really, at negative cost as each customer cost money from investors. I assert you I could get a lot of “customers” at this price.

That those customers will stay once they are told to pay more and more(one way or another, with money or their privacy being sold to governments and big corporations) is another story. There will be alternatives for sure in the future.

FB can’t grow because is so big and people ignore their ads.

FB was overpriced more than 10x times, so the dynamic is a vicious cycle down. If the best employees start selling their stock when they let them (August the 19 th) for getting the money and creating their own companies, facebook will be over. 20 somethings geek mercs don’t stay code diving for a company forever. One day they start thinking about raising a family and chilling out.

Jose on July 29, 2012  · 

PS: I bought shares from Microsoft and Google IPOs. They were radically different to FB.

Adan on July 30, 2012  · 

You’ve added to a losing position. So yes, you’re not a trader. Are you making a killing on your Spanish bonds yet? Oh yea, interest rates in Spain keep going up! Thanks for your tips, Martin..

Mark on July 30, 2012  · 

Still interested in getting a reply to my query if anyone wants to advise?

Amaury on July 30, 2012  · 

Mark, I don’t know how things work in Europe, but here in the US I would advise someone in your position to at least consider the simple task of opening an account with an online broker such as TD Ameritrade, and you would pay a one time commission of around $7.99 for as many shares as you’d like to purchase at one time. No other costs will be associated with such a purchase with some brokers, and I think TD may be one of them. Some online brokers charge a monthly maintenance fee that can be offset by any commissions that you pay them. Let me know if you have any additional questions, and I’ll do my best to help.

Diego on July 31, 2012  · 

I also have a few but not many, an important number of shares from Facebook employees will free up in the coming few months, and could make for a better buying opportunity.

Interesting article on this:

http://www.latimes.com/business/la-fi-facebook-shares-20120728,0,1045145.story?track=rss&dlvrit=52116&cid=dlvr.it

jb on August 2, 2012  · 

Mark, in Spain you can trade shares using almost any bank (you trade via internet), fees for trading are not tipicaly high but take a look to custody fees: they can be high. Usually e-banks have much better conditions, and even there are some that do not charge custody fees, such as ING Direct (they are based in Netherlands but licensed to work in Spain as well). You can also open an account with a broker in your country or another one (UK etc. be careful which one you choose, be sure they are licensed by the regulators and thay have good reputation).
Ps. better for you to choose a specialized forum for novice trading and ask anything you need there, internet is plenty of that… You won’t be off-topic and find a lot of people sharing their experiences and giving you advice on banks/brokers etc.

Mark on August 2, 2012  · 

jb and Amaury, thank you both for your responses, much appreciated, very kind of you.

Gurusblog on August 8, 2012  · 

Martin I agree with your analysis. I attached you the calendar on FB lock shares. Too much pressure for the next 8 months.

http://www.gurusblog.com/archives/facebook-lockup/07/08/2012/

Noam Gonen on August 15, 2012  · 

Long term I tend to agree, the critical mass accumulated has to be worth north of 20. However, I think you’re missing a transient bump that would have allowed you to get it for much cheaper. So I’d wait till XMAS, after bump, lazy market and do your killing then. What do you think???

Reasoning: This Thursday, 271.1 million shares become freely tradable. Another 133 million get freed up between now and November 13, along with 55 million RSUs and 55 million shares subject to employee options. The real whopper is on November 14 when 1.197 billion additional shares are greed for trading, along with another 20 million shares tied to RSUs. Next May, another 47.3 million shares held by Mail.ru and DST Global become free trading. That is – what’s the word? – a crapload of additional supply. And in case you happened to take Econ 1A, you can draw a basic supply and demand curve – which tells you that when supply increases, prices fall. (quoted from Forbes)

Pensamientos Neoliberales on August 16, 2012  · 

I guess you bought some more today, no?? FB@20$…

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