“The $28 Billion Man”

Sydney M. Williams

Thought of the Day (2)

“The $28 Billion Man”

February 2, 2011

The financial press this morning was filled with stories of new billionaires. “From Founders to Decorators, Many Will Share in Facebook’s New Riches,” read the headline in the New York Times. Certainly the dollars are almost beyond comprehension and the expected underwriting fees of a quarter of a billion dollars have Wall Street investment bankers salivating. But the real story is in the business that grew from an idea to more than a billion dollars in net income in eight years.

On Wednesday, Facebook filed for a $5 billion public offering, representing between 5 and 6.5% of the shares outstanding, valuing the company between $75 – $100 billion. In contrast, Google, when it went public in 2004 was valued at $27.2 billion. However, Google was priced at 18X 2003 revenues and an astronomical 256X net income per share. In the interim, Google stock has risen seven-fold from its IPO price, while its revenues are up twenty-five fold and its net income has soared ninety-one times. Net income margins have risen from 7% to 26%.

Nobody today would argue that Google overpriced their IPO. The future is never visible, but the same could be true for Facebook. At the high end, it would be priced at 27X last year’s revenues and 100X 2011 net income. While personally I have trouble investing in companies of this nature, any company that touches the lives of almost 12% of the world’s population, while generating net margins of 27% is surely an extraordinary business.

The great revolution of the past decade and the one we continue to experience is the one of connectedness. Cell phones, e-mail, texting, twittering keep us connected in a way unimaginable two decades ago. Social networks allow people to share everything, in real time, from gossip to photos to ideas. The fact that 845 million people are connected via Facebook provides enormous markets for advertisers. Technology allows members to be compartmentalized according to job, age, sex, interests and income, providing more opportunities for direct marketers. Social networking will create new businesses, most of which I could not envision.

There will also be losers. People, companies and countries that do not adapt will be left behind. Education becomes increasingly critical. The gap between the rich and the poor is more likely to widen further, not moderate. Additionally, there is the question of control, as all of our personal information is on a “cloud,” something people like me have a hard time understanding. The internet, and social networking in particular, foster democracy in the free spread of ideas, but these same tools, in the wrong hands, provide the potential for control. While we celebrate the changes, we should be wary of their misuse.

Mark Zuckerberg was born on May 14, 1984. Should the IPO of Facebook shares, be priced at the high end of expectations, it will make him worth more than a billion dollars for each year of his life. When I graduated from college, conventional expectations were that if one earned a thousand dollars for each year of life, one would be deemed successful. How different is the world we inhabit today!