Mr. Zuckerberg made his first public appearance since the Facebook IPO debacle this week at TechCrunch’s Disrupt Conference. He spoke pretty candidly about his mobile strategy (and the fact that it was in “a pretty bad place” 6 months ago…). He dismissed the idea that Facebook was going to jump into the telecom business and offer a smartphone option.

I commend him for finally getting out and speaking publicly. This is the job of the CEO of a publicly traded company.
Nevertheless, it’s too bad that he and his IPO underwriting team didn’t acknowledge the mobile situation (or lack thereof) back on May 18th when the stock started trading (or back in February when Facebook submitted its S-1) – maybe then billions of dollars in market value wouldn’t now be lost. Of course that would also mean that hundreds of millions of dollars wouldn’t be in the pocket of Mr. Zuckerberg. Oh well – C’est la vie!

While his appearance this week was a start, Mr. Zuckerberg needs to continue to do a much better job of communicating the company’s strategy for building Facebook AND making money. To say “we are working on it” isn’t going to help add value. Only when the market can see tangible results predicated on a plan being executed upon, might the company’s stock have a chance to rebound. Based on everything I’ve seen and read, I don’t believe this will happen for quite a long time.

For the past month, I have followed Facebook’s lead and remained quiet during the “quiet period.” The reason for this was there was nothing to say. Everything that needed to be said was already said, and Facebook hadn’t put out any news of major business importance.

The quiet period is essentially a “cooling-off” period in which a company going through an IPO must be silent, so as not to inflate the value of its stock artificially.  However, the SEC said that, notwithstanding the quiet period, issuers are permitted to continue to publish “factual business information.”

Does the fact that Facebook didn’t put out any news suggest that nothing took place in the company during the past month?  Or, was the quiet period an excuse for remaining silent just because they have yet to figure out their communication policy as a public company?

Well, today the quiet period officially ends, and so does my silence.   I am anxiously awaiting the analyst reports from the banks that helped take Facebook public – especially Morgan Stanley who led the deal.  Once I get my hands on the reports I plan to compare them to what was in the prospectus. Theoretically, they should be the same. Under Reg FD, how could they not be? Unless someone was privy to information not made available to everyone.

I will be looking very closely at how the analysts model Facebook and if they can possibly justify an IPO valuation upward of $100 billion. Or, it will be interesting to see if their valuations are more in line with the company’s current valuation of less than $70 billion.

Once I have a chance to review, I will report back on what the analysts say and what investors should be looking for before investing more money in Facebook. In the meantime, I recommend that everyone subscribe to the company’s IR alerts (I subscribed immediately following the IPO but have only received one alert indicating that Ms. Sandberg was named to the company’s Board of Directors – very significant news).   Let’s see how many alerts we receive.  This is the information that theoretically should demonstrate how the company is going to grow its business, revenues and profits; how it is going to diversify its business model beyond advertising; how its advertising business is really doing; how the company will monetize its mobile platform that in my opinion is lousy; how it intends to communicate with those like me and you and whether there is a chance that it will be transparent with investors; and how it intends to behave like a public company and treat the investment community with the respect it deserves.

The quiet period is over.  This can no longer be an excuse for the failure of Facebook to communicate.  The company’s investor relations have been disgraceful to date.  But, the opportunity still exists for them to turn this around.

Stay tuned.

While the issue of the big institutions getting material information during the roadshow and the individual investors not getting the information is very problematic with respect to Reg FD, the real issue that the market should be looking at is whether there was ever a correlation between the valuation ultimately placed on the company and its earnings and revenue.

There definitely was not.  Facebook’s S1 reports revenues of $4 billion and profit of $1 billion based on an advertising business model. If we were to use the best of multiples, we would use Google, which  trades at a multiple of approximately five times advertising revenue.  This would translate to a Facebook valuation of $20 billion, which is far from $100 billion.

This is the issue that everyone should be focusing on since, at the end of the day, regardless of whether the reduction in revenues and profit was disclosed properly, Facebook is still way overvalued.

Tomorrow Facebook will go public with a stock price as high as $38 and a market value of more than $100 billion.

This is great news for all the insiders who are selling shares and the institutions who are able to get in on the deal since they pay the mega bucks to the investment bankers on the book. But it is terrible for the little guy who will only be able to buy shares in the open market once the deal prices and the shares start trading (at a huge premium to the company’s true value).

Remember the year 2000? I do. But apparently the “30-something” bankers and portfolio managers don’t. And why should they? In 2000, they hadn’t even graduated from college. This is not meant to be disparaging , but more of a lesson in learning from the relatively recent past! As philosopher George Santayana famously said, “Those who cannot remember the past are condemned to repeat it.”

I believe that Facebook is the second coming of the Internet bubble and many people will be sorely disappointed (and poorer) when it bursts.

I can’t blame the financial folks for taking advantage of a naive market under-educated on how companies should be valued.  At the same time, we shouldn’t stand by and let everyone conveniently forget what happened to companies like Razorfish, Pets.com and eToys and an irrationally exuberant stock market that precipitated the penultimate recession.

As a former lawyer, I am a believer in the concept of let the buyer beware. Hopefully my series of blogs on Facebook will cause individuals to think twice before investing in the company only to find out (in the not too distant future) that their investment is worth significantly less.

The scenario unfolding with Facebook could not be more predictable (actually deja vu of the Internet bubble of 2000). As reported in the Wall Street Journal today, there is a frenzy going on to get in on the IPO. Demand has far surpassed supply, so what’s a banker to do – raise the stock price range, I mean the valuation of the company?  This is a basic economic principle… right?

But at whose expense are they jacking up the price?  It’s at the expense of the little guy who doesn’t understand the correlation between stock price and valuation. It’s at the expense of people like my grandparents who are in an investment club in Sarasota, Florida.  People who don’t fully understand the correlation between stock price and valuation are getting taken.

Other than this frenzy, what has changed during the past two weeks that would possibly justify an increase in the value of Facebook by billions of dollars?  Absolutely nothing. In fact, there has been an acknowledgment that the company’s growth strategy, especially with respect to the all important mobile element, is not sound.

Here’s my prediction: Facebook will crash and burn unless the company can better communicate where it is going with its business. And who will suffer as a result?  The little guy who doesn’t understand the correlation between stock price and valuation.  The person who is caught up in the moment of the frenzy and who purchases Facebook stock at what will probably be a high ($34 – $38).

Just wait until the company reports its first earnings as a public company – then you will see what I am talking about.  Groupon is not an aberration.

I just read that Facebook may raise the price range of its IPO and, if it does, will be filing yet another S-1 in the coming days.  I have been blogging about the baselessness of the proposed valuation of Facebook since prior to the roadshow commencing. To sum up almost 10 blogs (http://bit.ly/DiaryofanIPO) — I believe this might just be one of the most egregious investor abuses and/or insanity in the past several decades.

Why? Facebook, in its initial S-1, amended S-1 and amended, amended S-1 filed this week in no way justifies its nearly $100 billion valuation. And, now it’s being reported that it might increase its valuation by 20% and, as a result, will have to file yet another S-1???

The craziness is that nothing in the S-1 has changed in regards to the company’s business or growth plan/strategies.  Indeed, one of the significant changes in the most recent S-1 is that its mobile strategy is problematic and that the company may struggle to monetize any such mobile strategy and achieve profitability.

Bottom line, a near $100 billion valuation based on this is a far reach – a near $120 billion valuation is absurd.  Investors beware.  Stay tuned . . .

So many of those who attended – I mean those who were invited to – yesterday’s Boston investor meeting for Facebook, were probably served a delicious rubber chicken.  And no less important, they were likely exposed to the company’s mobile strategy and business plan. The Wall Street Journal reported today that Michael Mullaney the Chief Investment Officer  at Fiduciary Trust Company said he left the luncheon feeling that the company has a “definite plan” and that he felt “more comfortable with its story” than he was before.

Lucky Mr. Mullaney!  But what about me and the thousands of other interested individuals who only have access to the company’s S-1?  What about those who did not (and probably will not) have an opportunity to hear the Facebook story and have their questions answered by COO Sandberg and CFO Ebersman (it’s worth pointing out that CEO Mark wasn’t there – if he is going to continue acting like a college kid we might as well be on a first name basis)?

My point is that this flies directly in the face of SEC Reg FD. Given the lack of explanation about where Facebook is going in the S-1, the investor playing field is not level.  And something needs to be done about this.

Here’s a solution: give me an invitation to all the upcoming investor luncheons.  I will attend each of them at my own cost and will blog about what is said so that everyone can have access to the same information as those attending the roadshow meetings. Complete transparency – are they ready for that?

And, if cost is an issue, the party planners don’t have to worry about feeding me a rubber chicken, since I’m a vegetarian.

It was just reported that Facebook has made yet another acquisition, and  this time it’s “for an undisclosed amount.”  I’m not sure why they’re being so secretive  since it certainly can’t be more than the $1 billion acquisition of Instagram or $550 million acquisition of former AOL patents from Microsoft.

The acquisition I am referring to is that of mobile app, Glancee, which allows users of Apple iOS and Android devices to sign into Facebook and then socialize with others nearby who have similar interests.

In its S-1, Facebook made it clear that mobile will be part of its growth strategy.  But, that’s as far as the S-1 goes in discussing how it intends to monetize mobile.  As a soon to be public company, this is what is going to be relevant to the company’s shareholders – they can’t keep beating around the bush.

Where do I think Facebook might be going? In terms of monetization and the mobile strategy, it looks like Facebook will have to move past just being an app (albeit an app with 900 million users).  Google controls Android devices; Apple controls iPhones and iPads – so where does this leave Facebook?  Any chance it may acquire flailing RIM’s Blackberry empire and really establish itself as one of the 21^st Century technology behemoths?

Stay tuned . . .

The Facebook IPO roadshow is scheduled to begin next week with the IPO slated for May 18. The Wall Street Journal said that Mark Zuckerberg might, and I highlight, might grace investors with his presence at some of the roadshow events.

This really troubles me – and it should trouble any and every institutional investor considering an investment in the company. It should also trouble every retail investor who thinks this might be his or her lifetime salvo.

As promised, I have reviewed the amended S-1 filing submitted on April 23, 2012. For those fortunate to attend the roadshow gatherings (I am still waiting for my invitation), here are five questions that need to be asked and answered before anyone should commit their hard-earned dollars to support Mr. Zuckerberg and the many pre-IPO investors who are looking forward to their liquidity event.

• 85% of Facebook’s revenue in 2011 was generated from advertising and the rest from “payments.” This is more or less the same for the March 31, 2012 quarter. What is the plan to diversify the company’s revenue? And, please, be a little more specific than just suggesting “we will diversify.” A glimpse into a business plan would be helpful.

• To this point, the company says that advertising on the social web, while undoubtedly a significant market opportunity, is still emerging and evolving and advertisers are still learning. To the extent that 85% of Facebook’s business is advertising based, how can a ~$100 billion valuation be justified without further explanation? For those of you crunching the numbers, this equates to a 33x advertising revenue multiple – Google only trades at a 5.5x advertising revenue multiple.

• 11% of total revenue for the March 31, 2012 quarter came from Zynga. Based on your total revenues for the quarter, this would equate to approximately $116 million. Total revenue from the “payment” business this period was $186 million. Therefore, Zynga comprises 63% of payment revenue which means that only one-third of payment revenue is from others. If Zynga figures out its own solution – at some point why wouldn’t it? –revenue from payment would essentially disappear and Facebook’s entire business is almost exclusively based on advertising. What is the plan to change this?

• Facebook has elected to be a “controlled company” under the corporate governance rules for NASDAQ since the company’s CEO controls a majority of the outstanding voting power. This means that the company isn’t required to have a majority of its Board be independent. It also means that it doesn’t have to have a compensation committee or independent nominating function. THIS IS A RED FLAG FOR EVERY INVESTOR. Is Mr. Zuckerberg trying to have his cake and eat it too?  Reap the benefits of being a public company and, at the same time, maintain the benefits of controlling a private company?

• What other Instagram-style acquisitions are in the works? You need to shed light on what you mean when you say you plan to make frequent and rapid product decisions that may reduce short-term revenue or profitability even though they are consistent with your overall mission. How are we supposed to value Facebook based on so much uncertainty (or lack of clarity)? How do we value what it means when you say you will improve the aggregate user experience to improve financial performance over the long term?

I’ll say it again – I don’t want to be all doom and gloom. With a user base approaching 1 billion, there is no question that Facebook has the ability to grow in a big way. The issue I have is one of communications.

Yes the numbers will speak for themselves, but there is more to a company than numbers. It’s about the character and attitude of management, particularly the CEO. It’s about understanding a company’s growth plan beyond a moral vision. And, it’s about transparency in communications.  Without a full understanding of each of these, a proper valuation cannot be determined.

Stay tuned …

I am about to sit down with the most recently filed version of Facebook’s S1 IPO filing and sift through yet another several hundred page document full of legalese and numbers.  In a previous blog, when the initial S1 was filed, I noted how I was disappointed that there was not a whole lot of information in the filing to justify a $100 billion valuation.  With so many gaps to fill, here are a few items that I hope are addressed in the amended version.

First, I hope that Facebook explains its acquisition strategy. In the initial S1, the company’s acquisition strategy was not discussed in great detail.  Clearly, the $1 billion acquisition of Instagram and the company’s recently announced intent to acquire $550 million of Microsoft’s patents are part of a plan to grow Facebook’s business.  At the same time, it is also an acknowledgement that organic user growth isn’t the be-all-end-all for the company.

Second, I will be looking to see whether the new S1 speaks more to the company’s corporate governance intent, particularly with respect to Mr. Zuckerberg’s voting power.  See my previous blog regarding the Instagram acquisition and you will understand what I am talking about when it comes to shareholders having a say in the future of the company.

Finally, what is the company’s business plan?  In my first blog discussing the Facebook IPO, I noted that based on what was presented in the initial S1, I had no idea what the company planned to do to justify a $100 billion valuation. What are its plans to monetize its nearly billion person user base?  How is it going to become less dependent on advertising?   I encourage potential investors to pay close attention to the amended filing to see how the company addresses these questions.

Significant value undoubtedly exists in Facebook.  The question is how much and how high should this valuation be?  So, here I go – I will let you know shortly what the updated S1 reveals.

Stay tuned . . .