ZNGA: Proxy for Facebook

As Facebook IPO date (May 17 or 24) comes near, everyone is getting ready to buy into this most awaited IPO since Google's IPO back in 2004 (same year when Facebook was founded). Only lucky few with connections to Wall Street or big brokerage accounts would get it at pre-IPO prices. Most of common investing public would have to wait to buy it on first day and given reaction to recent tech IPOs, this would most probably open 30-50% or more higher. So how does one participate in this Facebook mania without access to pre-IPO prices. Here is one way:
Based on today's updated S1 filing by Facebook, ZNGA is still major source of revenue for Facebook contributing nearly 15% of revenue. As Facebook devises various schemes to diversify its revenue sources, I expect this to come down to 8-10%. That's still substantial. If we apply same financial matrix, ZNGA should be valued at about 8-10% of Facebook due to similar nature and tight co-dependence on each other. At IPO prices Facebook is being valued at $100 Billion. With about 30% pop on first day, it could be valued near $120-130 Billion at end of first day. Even at 8% of Facebook valuation, ZNGA should be valued at $10 Billion. That means its stock should be around $14 which is where it was trading just few days back. So if you are looking for nice Facebook IPO effect, you may want to consider ZNGA between $8-9 provided you believe in all the hype which would be created by Facebook IPO. Personally I believe that we are in second Internet Bubble (see my last week's blog) at least when it comes to pricing some social startups.
Caveat: Personally I am investor in ZNGA. Do your own due-diligence before investing!

/Shyam

InstaBubble 2.0!

Lot happened in last 3 weeks since I wrote on Sachin's 100th century. Romney sealed (almost) GOP Presidential Nomination. N. Korean had failed rocket launch (no surprise there). AOL made cool Billion $ by selling patents to Microsoft. Apple crossed $600 Billion market cap - only 2nd company to do so ever - first one was Microsoft back in Internet Bubble 1.0. But what caught my attention was Facebook buying 12 employee company Instagram for $1 Billion. This reminds heydays of Internet Bubble 1.0 when Time Warner bought AOL for $180 Billion, Cisco buying Cerent for $6.9 Billion. SJ Mercury News and WSJ were full of such news in those days.

Is Silicon Valley back to its old tricks or glory days?

Only time would tell but excitement would continue well into May when Facebook would have its first day of trading either on May 17 or May 24. It is one of the most awaited IPO since Google's IPO. Question to ponder is: Would Facebook be valued more than Google on it's first day of trading? There is small but definite possibility of this happening. At IPO prices Facebook would be valued at about $110 Billion. If it is doubles on first day, it would be valued at $200+ Billion which is what GOOG is valued at. With so much valuation, $1 Billion must be chump change for Facebook. Apple investors, watch out for post-earnings reaction to Apple stock. I was visiting Apple store last week and observed that the "New" ipad was easily available unlike ipad2 for which I personally had to wait for 7 weeks and visit Apple store multiple times. Is this due to better supply chain management by Apple or due to only incremental improvements in new ipad compared to ipad2? Another factor could be: Many investors who made lot of money in Apple over last 3 years may book some profits to have some dry powder for Facebook IPO.
And then there is old saying "Sell is May and Walk Away".

Back in India, the biggest yearly Cricket Mela has started with IPL5 in full swing. I am again rooting for Mumbai Indians!

/Shyam