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The following is a reconciliation of FCF to the most comparable GAAP measure, net cash provided by operating activities:

 

  Year Ended December 31,

    2007    2008    2009    2010    2011 

  (in millions)

Net cash provided by operating activities

 

  $ 11   $ 8   $ 155   $ 698   $ 1,549  

Purchases of property and equipment

 

  (55 ) (70 ) (33 ) (293 ) (606 )

Property and equipment acquired under capital leases

 

  (11 ) (26 ) (56 ) (217 ) (473

Free cash flow

 

  $   (55 ) $   (88 ) $     66   $   188   $ 470  

 

 

So essentially investors are going to be payin 200x FCF for FB, I wonder how thats going to turn out :)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Another bone chilling tidbit:

 

(3)

The amount reported represent approximately $692,679 for costs related to personal use of aircraft chartered in connection with his comprehensive security program and on which family and friends flew during 2011. For purposes of reporting the value of such personal usage in this table, we use costs provided by the applicable charter company, which include passenger fees, fuel, crew and catering costs. The amount reported also represents approximately $90,850 for costs related to estate and financial planning during 2011.

 

Why in the heck does a 27 year old need to fly in a private jet with his friends and family. And if that is the case, why does the company need to pay for it?

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http://ragnarisapirate.blogspot.com/2012/02/running-like-hell-from-facebook-ipo.html

 

If they got every person in the world to use facebook, and ad revenue/earnings per user stayed where it is, they would trade between 13 and 19x earnings, provided that their market cap is between 75 and 100 billion, as has been quoted in the media...

 

This is madness.

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Why in the heck does a 27 year old need to fly in a private jet with his friends and family. And if that is the case, why does the company need to pay for it?

 

I'll take this one.

 

The reason is due to Zuckerberg's "comprehensive security program."

 

The reason why you're even able to comment on it is because elsewhere in the S-1, FB has outlined the terms of its private aircraft use.  They state explicitly that the CEO and COO are allowed to use the private aircraft for business purposes.  Zuckerberg is allowed to use the private aircraft for any purpose because his security program requires that he doesn't fly commercial.  If Zuckerberg travels with family and friends, the flight cost attributed to them is added to Zuckerberg's compensation so that everyone can see.

 

So, not really bone chilling and it seems like an honest inclusion to me.

 

From the S-1:

Our compensation committee has also authorized our CEO and COO to use private aircraft for business purposes. This practice maximizes such executives’ productive time and ensures their quick availability. In addition, Mr. Zuckerberg may use private aircraft for personal purposes in connection with his comprehensive security program. On certain occasions, Mr. Zuckerberg may be accompanied by family members or others when using private aircraft. For flights involving passengers flying for personal purposes, the aggregate incremental cost of such personal usage is reported as other compensation to Mr. Zuckerberg. The reported aggregate incremental cost is based on costs provided by the applicable charter company, and includes passenger fees, fuel, crew and catering costs. The incremental cost attributable to Mr. Zuckerberg’s use of private aircraft in 2011 is disclosed in the “All Other Compensation” column in “—2011 Summary Compensation Table” below.

 

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Why in the heck does a 27 year old need to fly in a private jet with his friends and family. And if that is the case, why does the company need to pay for it?

 

I'll take this one.

 

The reason is due to Zuckerberg's "comprehensive security program."

 

The reason why you're even able to comment on it is because elsewhere in the S-1, FB has outlined the terms of its private aircraft use.  They state explicitly that the CEO and COO are allowed to use the private aircraft for business purposes.  Zuckerberg is allowed to use the private aircraft for any purpose because his security program requires that he doesn't fly commercial.  If Zuckerberg travels with family and friends, the flight cost attributed to them is added to Zuckerberg's compensation so that everyone can see.

 

So, not really bone chilling and it seems like an honest inclusion to me.

 

From the S-1:

Our compensation committee has also authorized our CEO and COO to use private aircraft for business purposes. This practice maximizes such executives’ productive time and ensures their quick availability. In addition, Mr. Zuckerberg may use private aircraft for personal purposes in connection with his comprehensive security program. On certain occasions, Mr. Zuckerberg may be accompanied by family members or others when using private aircraft. For flights involving passengers flying for personal purposes, the aggregate incremental cost of such personal usage is reported as other compensation to Mr. Zuckerberg. The reported aggregate incremental cost is based on costs provided by the applicable charter company, and includes passenger fees, fuel, crew and catering costs. The incremental cost attributable to Mr. Zuckerberg’s use of private aircraft in 2011 is disclosed in the “All Other Compensation” column in “—2011 Summary Compensation Table” below.

 

You can't be this naive? Do you really believe that Zuckerberg is such a high profile human being that he needs to only fly private? While Senators and Congressman still fly first class? Moreover, if he is part of such a comprehensive security program why does he knock down pints at the local bars in Palo Alto, and where is his "security detail" I have never seen a photo of him surrounded by anybody.

 

This is just a way to rationalize his usage of a private jet utilizing shareholder funds.

 

 

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Why in the heck does a 27 year old need to fly in a private jet with his friends and family. And if that is the case, why does the company need to pay for it?

 

I'll take this one.

 

The reason is due to Zuckerberg's "comprehensive security program."

 

The reason why you're even able to comment on it is because elsewhere in the S-1, FB has outlined the terms of its private aircraft use.  They state explicitly that the CEO and COO are allowed to use the private aircraft for business purposes.  Zuckerberg is allowed to use the private aircraft for any purpose because his security program requires that he doesn't fly commercial.  If Zuckerberg travels with family and friends, the flight cost attributed to them is added to Zuckerberg's compensation so that everyone can see.

 

So, not really bone chilling and it seems like an honest inclusion to me.

 

From the S-1:

Our compensation committee has also authorized our CEO and COO to use private aircraft for business purposes. This practice maximizes such executives productive time and ensures their quick availability. In addition, Mr. Zuckerberg may use private aircraft for personal purposes in connection with his comprehensive security program. On certain occasions, Mr. Zuckerberg may be accompanied by family members or others when using private aircraft. For flights involving passengers flying for personal purposes, the aggregate incremental cost of such personal usage is reported as other compensation to Mr. Zuckerberg. The reported aggregate incremental cost is based on costs provided by the applicable charter company, and includes passenger fees, fuel, crew and catering costs. The incremental cost attributable to Mr. Zuckerbergs use of private aircraft in 2011 is disclosed in the All Other Compensation column in 2011 Summary Compensation Table below.

 

You can't be this naive? Do you really believe that Zuckerberg is such a high profile human being that he needs to only fly private? While Senators and Congressman still fly first class? Moreover, if he is part of such a comprehensive security program why does he knock down pints at the local bars in Palo Alto, and where is his "security detail" I have never seen a photo of him surrounded by anybody.

 

This is just a way to rationalize his usage of a private jet utilizing shareholder funds.

 

 

 

Actually, I'm not bothered by this at all.  I would never fly private, but then again, I would never waste a dime flying first class either...and I can't ever imagine being so well-known that anyone would ever try to kidnap me.    This is no different than thousands of other executives who fly by private jet due to efficiency, security, convenience and flexibility.  Buffett does...Prem does...and they are some of the most careful and prudent CEO's around with shareholder capital.  Zuckerberg is probably one of the most well-known figures in business today, and probably 100 times more immediately recognizable than most senators, congressman et al.

 

On the other subject of valuation:  I would never touch this thing, but it's exact worth is something that is somewhat intangible at the moment if we go by recent history.  Who thought iTunes would have such a dramatic effect on the music, video or television industry?  Or Amazon on the book publishing business!  How about what Netflix did to Blockbuster?  I never thought Facebook would become as prominent and utilized as it is, nor did I see what Google would turn their search business into.  Friggin' search alogrithm of internet websites somehow killed traditional advertising and pretty much the newspaper business which relied on the high rates for advertising.  Go figure!

 

Facebook's value isn't in the facebook social utility, but the intangible value of what that virtual monopoly will allow it to venture into and exploit its built-in base of users.  Anything could happen!  I'm not good at predicting the outcome of disruptive technologies, and as such I have no ability to value this thing.  Cheers! 

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http://ragnarisapirate.blogspot.com/2012/02/running-like-hell-from-facebook-ipo.html

 

If they got every person in the world to use facebook, and ad revenue/earnings per user stayed where it is, they would trade between 13 and 19x earnings, provided that their market cap is between 75 and 100 billion, as has been quoted in the media...

 

This is madness.

 

While I agree that FB is overvalued, that is a ridiculous assumption. There is huge leverage, new advertisers/users do not add much expenses so most of the revenue flows to the bottom line and earnings grow much faster because of the gearing. Cost of revenue as a % of total revenue has gone from 29% to 23% over the last 2 years, for example. A large portion of today's expenses are spent on growth, so earnings are depressed, and FB is just at the beginning of monetizing their user base. If everyone in the world was on facebook they would put their attention solely on monetizing, instead of growth.

 

The market isn't focused on current financials, and they are right not to. Growth matters now, monetization will come later. But the expectations of how much monetization is possible and the risks entailed are too high.

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You can't be this naive? Do you really believe that Zuckerberg is such a high profile human being that he needs to only fly private? While Senators and Congressman still fly first class? Moreover, if he is part of such a comprehensive security program why does he knock down pints at the local bars in Palo Alto, and where is his "security detail" I have never seen a photo of him surrounded by anybody.

 

This is just a way to rationalize his usage of a private jet utilizing shareholder funds.

 

Yes I actually do believe he is such a high profile human being that he has a security detail that restricts him from flying on a commercial airliner.

 

You bring up an interesting example with senators and congressman, considering that one got shot in the head last year.  Do you think that Zuckerberg, whose wealth, age, cultural background, unprecedented influence, and ability to impact the social lives of 850 million people (internationally) is more or less of a candidate for a security event than Gabby Giffords?

 

I guess your alternate theory is that a multi-billionaire is bilking his shareholders out of $700k to fly Mom and Dad to Asia, and then opted to tell shareholders about it in an S-1 by listing it as additional compensation, before he even accepted their money.

 

There are plenty of things in the S-1 that require scrutiny, like whether or not Sheryl Sandberg is worth $30mm a year, but I don't think that this is one of them.  If anything, I think FB is being extremely cautious and forthright with everything related to Zuckerberg because it's critical that he keeps his image squeaky clean.  In a typical CEO scenario I am certain that they wouldn't even bother reporting that a few friends and family hitched a ride on the company jet.

 

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This is where the 'other' side of value investing kicks in ...

 

1) A sceptic might argue that you IPO when your product life cycle has peaked. Future margin growth is unlikely to improve, & it will take at least 2Q's of publicly reported results for that to become evivident. If you make Hula-Hoops, you IPO at the peak of the fad.

2) Coolest of cool is 1 share of FB to go along with your latest smart phone, & even cooler if you can show your friends a digital certificate. Entertainment buying feeding mo-mo is always an opportnity.

3) UW's will extensively short the IPO to feed more shares to the favoured few, & reverse as soon as the support period is over. A squeeze to feed the mo-mo & the entertainment 'buzz'

 

... there will be a lot $ made skillfully riding this thing down, vs up.

 

SD

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I'm with Parsad and Hester - it is hard to make a solid bearish case here.  Or any case, bullish or bearish, for that matter.  Is it overvalued?  Probably, maybe a lot, but it is really hard to say that with enough certainty to be actionable.  Facebook obviously has strong network effects, creating a powerful moat, and they are probably very early in the game of figuring out how to monetize their captive audience.  Revenue per user will go up, perhaps dramatically.  The story-stock nature of the hype around facebook, combined with the nosebleed valuation to current FCF, imply that it is probably overvalued - but it is really difficult to pin that down with any certainty.

 

Wow - there are a lot of "likely"s, "probably"s, and "maybe"s in that paragraph.  That tells me that 1) I'm a poor writer and 2) Facebook, long or short, is in the too-hard category.  Fun to talk about though!

 

Good article Ragnar.

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http://ragnarisapirate.blogspot.com/2012/02/running-like-hell-from-facebook-ipo.html

 

If they got every person in the world to use facebook, and ad revenue/earnings per user stayed where it is, they would trade between 13 and 19x earnings, provided that their market cap is between 75 and 100 billion, as has been quoted in the media...

 

This is madness.

 

While I agree that FB is overvalued, that is a ridiculous assumption. There is huge leverage, new advertisers/users do not add much expenses so most of the revenue flows to the bottom line and earnings grow much faster because of the gearing. Cost of revenue as a % of total revenue has gone from 29% to 23% over the last 2 years, for example. A large portion of today's expenses are spent on growth, so earnings are depressed, and FB is just at the beginning of monetizing their user base. If everyone in the world was on facebook they would put their attention solely on monetizing, instead of growth.

 

The market isn't focused on current financials, and they are right not to. Growth matters now, monetization will come later. But the expectations of how much monetization is possible and the risks entailed are too high.

 

I don't mean to be argumentative, but, did you read the link? When I was talking about growth, I did mention how they could juice more money out of the site, and how I was doubtful that they could do it in such a way that would justify the stock price. I also talked about how I am skeptical that their cost structure would get cheaper forever (it's kind of along the lines of a marginal cost curve)...

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I don't mean to be argumentative, but, did you read the link? When I was talking about growth, I did mention how they could juice more money out of the site, and how I was doubtful that they could do it in such a way that would justify the stock price. I also talked about how I am skeptical that their cost structure would get cheaper forever (it's kind of along the lines of a marginal cost curve)...

 

Well notice I didn't criticize your article which I did read, since I agree with the premise that FB is probably overvalued. I was commenting on your assumption; If Facebook were to get everyone in the world to join they would be trading at 13-19 times earnings. That is completely ridiculous, because there is undeniable gearing as the costs to maintain the site and the business are mostly fixed, while each new user/advertisor dollar of revenue brings in little new expenses. Their cost structure stays the same in an absolute sense as more and more revenue comes in, which is the point. There is not a chance earnings per user would stay the same if everyone in the world joined.

 

When you say you are skeptical that their cost structure could get cheaper forever you are probably referring to this that you wrote:

 

"Maybe it get's infinitely cheaper for Facebook to add users in the future? But, due to how marginal cost works, I don't think that will last forever... Besides, their margins are already about as hefty as Googles!"

 

If they get all the users in the world they won't have to spend a dime on adding new users, thus earnings would explode making your original assumption wrong. Furthermore if everyone was on Facebook they would have more active users than Google so even if they maintained the same margins as Google (there are some reasons to think margins will be higher) they would be worth more. GOOG is currently valued at twice the market cap of FB right now and isn't exactly expensive.

 

 

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We will short FB, just as we shorted all these other hyped up social network companies. We are shorting them intraday as we speak as they have all popped on the "Facebook effect".

 

You will be right over the long run but shorting hyped up open ended growth stories is an extremely hard way to make money.

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"We do not currently directly generate any meaningful revenue from the use of {our} mobile products, and our ability to do so successfully is unproven. Accordingly, if users continue to increasingly access {our} mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, our revenue and financial results may be negatively affected."

 

Some might think this risk factor is from MSFT's K. It's not :-)

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"We do not currently directly generate any meaningful revenue from the use of {our} mobile products, and our ability to do so successfully is unproven. Accordingly, if users continue to increasingly access {our} mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, our revenue and financial results may be negatively affected."

 

Some might think this risk factor is from MSFT's K. It's not :-)

 

Maybe their margins won't do so much better after all. Hester, this is kind of what I was getting at in my article. Especially at the end, when I said that they were going to have to figure out a ton of different ways to make money to justify their share price- the uncertainty of that alone makes me uneasy. If everybody uses FB on a platform that doesn't really support ads, then they are screwed.

 

As a side note, facebook doesn't make nearly as much money on me as their typical user; I have installed an app on chrome (and they make it for firefox as well) called AdBlock. I have not seen a Facebook ad in a while. It's kind of nice. You guys might want to check it out.

 

AND it also blocks the ads on this very site! Sorry Sanjeev. (but not too sorry) ;)

 

 

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As a side note, facebook doesn't make nearly as much money on me as their typical user; I have installed an app on chrome (and they make it for firefox as well) called AdBlock. I have not seen a Facebook ad in a while. It's kind of nice. You guys might want to check it out.

AND it also blocks the ads on this very site! Sorry Sanjeev. (but not too sorry) ;)

 

The current one is called Adblock Plus.  I've been using it since it was just called Adblock going back probably 8-10 years.  I haven't seen an ad on the internet for so long it always strikes me as weird when I see someone else surfing the web and sites like facebook, yahoo or others have these ads everywhere filling up the screen real estate and flashing at them, or even more annoying, popping up windows in their face.  I guess I'm glad other people are paying my way by viewing and responding to all these ads and allowing web-sites to make money from them so that they are available for free to me. But I don't know why they do it when an easy and free solution is available.

 

 

<editing my post> I forgot to comment about FB.  I wouldn't invest in FB due to it being in the "I can't predict the future" category.  It could very well turn out to be a good investment from the IPO price long term, but even if it does it will go down at some point before then.  There is no way anyone has enough information to know right now.  My profession is in high tech (Integrated Circuit design) yet I almost never invest in technology companies.  I know enough about technology to know how unpredictable it is. The only tech stocks I own are GOOG, ISRG, and restricted stock in my own company that I've been given as compensation.  And I've been trying to re-evaluate my ISRG position, my cost basis is $108 and I'm not sure my original thesis for buying it still holds at its current valuation.  But like usual when I'm not sure what to do I do nothing until I am sure.

 

--Eric

 

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