By Sanjay Sanghoee
FORTUNE -- Shortly after Facebook's recent announcement of a new public offering worth $1.5 billion, for which Mark Zuckerberg provided 60% of the shares, Facebook stock fell amidst concerns that it is overvalued. The shares rebounded on optimism about social media, but it is a safe bet that such doubts will continue to plague the company in 2014.
But the market may be missing the bigger picture.
In terms of the new offering and particularly Zuckerberg's role in it, even visionary founders are entitled to monetize their ownership over time, and so this may not be a signal of anything sinister. Besides, the shares being sold by Zuckerberg account for only 10% of his holdings in Facebook (FB) and only 2.5% of the voting power, so the impact to his control will be minimal.
Analysts have also questioned why Facebook would finance its capital needs via equity instead of debt. While it is true that debt is cheaper than equity, especially in a low interest rate environment, debt also comes at a cost, which can sometimes outstrip that of equity. While Facebook is currently cash rich with $3.1 billion of cash and equivalents sitting on its balance sheet vs. only $575 million of debt (not to mention $1.6 billion of operating income through the third quarter of 2013), debt can quickly become a burden on the company during leaner times. More importantly, even though banks might happily lend the company money, they will impose restrictions on future strategic moves and experimental projects that Facebook may consider crucial to its growth. Such restrictions are particularly onerous for technology companies that need to innovate quickly to meet the changing demands of consumers.
Finally, the fundamentals. What bearish investors are missing about Facebook is that the power of the company's social media platform does not lie in its immediate profit potential but in its formidable reach and addictive nature. With 1.19 billion users, Facebook reaches 17% of the entire world's population, a fact that positions the company as probably the most powerful medium of the new millennium, and while its popularity with teens may have declined somewhat, it remains and will remain in the foreseeable future, the Match.com of social media.
Its ad-delivery engine is excellent, and the company has managed to crack the $9.6 billion mobile advertising market (the company makes half its revenues through ads to the 500 million people who check Facebook on their phones every day). While Facebook has faced intense criticism because of its track record on privacy, the reality is that what the data mining the company has been doing (officially or unofficially) is enabling it to enhance its user experience constantly. What all this means is that the stock contains a lot of potential that remains to be tapped, and should remain attractive to value investors.
Investors are welcome to question the company's motives for selling new shares (my best guess is that Zuckerberg wants to pump more money into exploring new technologies à la Google (GOOG) and into enhancing the mobile experience to increase its ad revenues from that side) as well as its valuation, but they should also remember that Facebook stock fell nearly 50% after its botched IPO and has had to rise from (arguably) an artificially low baseline – making the likelihood of overvaluation even more remote.
So for investors who are willing to weather temporary doubts and hold a great asset, there will be plenty to "Like" about the stock in 2014.
Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein. He does not own Facebook shares.
Facebook is clearly tipping its hand today, saying that its stock is overvalued and the company isn't going to perform as well as the market believes it will.
By Cyrus Sanati
FORTUNE -- Mark Zuckerberg, founder and CEO of Facebook, will sell 41.4 million shares worth of stock in the company, worth $2.3 billion, to pay a tax bill, the company said. He apparently incurred the tax liability when he exercised the option MOREDec 19, 2013 3:00 PM ET
A new study reports there are more U.S. jobs in math and science than previously thought, if you know where to look.
FORTUNE – As Congress debates the future of the nation's immigration laws, lots of attention has been paid to highly skilled workers graduating from top U.S. universities. The biggest names in the tech industry have lobbied to make it easier for them live and work in America. They say many MORENin-Hai Tseng, Writer - Jun 5, 2013 7:59 AM ET
The botched offering is sure to make other successful startups think twice before putting themselves at the mercy of the common markets.
FORTUNE --There are lots of lessons to be drawn from the Facebook IPO: Don't let your CFO scrounge for every last dime. Make sure your CEO pays wardrobe deference to Wall Street. Remove board members who are more loyal to their bank accounts than to the company. But those MOREDan Primack - Sep 21, 2012 5:00 AM ET
There will be a flood of shares hitting the market when employees and insiders sell, which could hurt the new shareholders the most.
FORTUNE -- Add taxes to the potential reasons the social network's stock didn't pop in its IPO. The issue is the $4 billion dollars that will be owed by Facebook's employees as part of their stock windfall in six months. That tax bill is almost certain to lead MOREStephen Gandel, senior editor - May 18, 2012 2:44 PM ET
Idle speculation, while waiting for Facebook to go public.
Mark Zuckerberg recently skipped a meeting of bankers and analysts at Facebook HQ, according to The Wall Street Journal. The report said that he "preferred to focus his time on developing the service," and that he "doesn't expect to play a hands-on role selling" the company's upcoming IPO.
Clearly this is a guy who still hasn't warmed up to the idea of his company MOREDan Primack - Mar 21, 2012 12:01 PM ET
Pay at the social media company makes Wall Street's fat cats look skinny.
Where's the Occupy Facebook movement?
Earlier this month, when the social media company filed for its initial public offering most of the attention was focused on the fact that Facebook could be worth as much as $100 billion. But what didn't get a lot of attention, or scrutiny, was what the company pays its top executives. It's a ton MOREStephen Gandel, senior editor - Feb 16, 2012 10:00 AM ET
Yesterday the Wall Street Journal got a huge amount of attention for reporting that Facebook is preparing to go public next year in an IPO that could value the company in excess of $100 billion. It became the top story on HuffingtonPost, and got prominent links/rewrites everywhere from Reuters to Drudge.
Huh? I've read the WSJ story several times, and can't find any information that hasn't been previously reported. The only MOREDan Primack - Nov 29, 2011 12:08 PM ET
Before you start scrambling to get a piece of the Facebook pie, it's worth looking at a few glaring risk factors.
Excuse me for raining on the Facebook parade, but yesterday's news about the $450 million investment by Goldman Sachs (GS) and $50 million from Russia's Digital Sky Technology didn't move me the way it seemed to move others. This despite the suggested $50 billion valuation, as big and beautiful a MOREDuff McDonald, Contributing Editor - Jan 4, 2011 12:13 PM ET
|Inside the underground sex economy|
|Obama wants to expand overtime pay|
|NJ agrees to ban Tesla direct sales|
|Mt.Gox CEO's U.S. assets frozen|
|Plug the financial leaks, now!|