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Zynga IPO to raise $1 billion dollars

December 4, 2011 Leave a comment

Games maker Zynga is hoping to raise $1 billion in tough market conditions with an IPO price of $8.50-$10 – giving it a valuation of $7 billion.  Zynga is offfering 14% of its float or 100 million shares, which is higher than most tech companies.

Lead underwriters Morgan Stanley and Goldman Sachs have an additional option to sell 15 million shares. Like Groupon and LNKD, I expect downward pressure on the price when the cost of shorting becomes feasible. If you are one of the lucky few who got in early through private placement it may be time to cash out!

It’s worth noting that a fund raising in February this year valued the company at $10 billion.

I cannot for the life of me understand why any ‘ethical’ investor would invest in a company that generates the bulk of its profits from the sale of virtual goods. (We are NOT talking e-commerce here.) Does it play a socially benefiting role?? We need more clean tech or bio tech!!! Game makers like Rockstar, which makes the highly successful Grand Theft Auto series, actually make money from selling games! Virtual goods are on another level!  How productive?

Retail investors should ask themselves: “Can I live in my virtual farm in Farmville when Fannie Mae repossess my home??!?”

For a copy of their IPO prospectus click on the link below:

Zynga IPO Roadshow Prospectus

 

Zynga IPO Roadshow Prospectus

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Groupon vs Facebook vs Google: The Rush for Multibillion dollar valuations.

April 5, 2011 13 comments

Back in the 2000s, Google was the darling of Silicon Valley. Social networking was at its infancy. It was fragmented with Friendster, MySpace and a few other niche players. If we imagine ourselves a couple of years back at the pre-Facebook era, Google was so dominant that, to the ‘uninitiated’, it was synonymous with the Web. (Some of you nerds might be saying, “Wait a minute, I was thinking AltaVista, Excite, Lycos, Yahoo!, FTP and Bulletin Boards on my superfast US robotics 14.4kbps modem”. I said a few years back, not freaking time-travel.)

Google, the Pre-FB years….
I, like most people then, did not think Google would be eclipsed quickly. Instead of creating a portal-like destination on the World Wide Web, Larry Page and Sergei Brin, both Stanford PhD dropouts, sought to organise and index the World Wide Web. Due to the explosion of information on the web, it was originally a cluttered place and users had no real way of finding the information they wanted with ease. Page and Brin devised a method of ranking search results by relevance. How would they know what was relevant? Bearing in mind search engines were not new then and Google was not the first, in fact far from it. How would Google distinguish between quality information and junk? Page and Brin reasoned that by ranking the results of the query in the order of the number of links linking back to that page, Google was presenting its users with results that other website/users have referenced – therefore the more ‘linkbacks’ a site has, the more relevant it would be. Hence the higher it would rank. It made perfect sense, as quality information would attract more people. Sort of like the same concept with academic citations and ‘wisdom of crowds’ or crowd sourcing. (Disclaimer: SEO has evolved greatly since those early days.)

Google’s superior search ranking algorithm helped direct users to the right place. In exchange for that free search service, Google opted for text- (only) based advertising that relates to the user’s search query – Pure Genius. Google went against the prevailing trend of banner advertising, flashy images and animated GIFs that were quickly polluting websites during the early days of the World Wide Web. So they built a money-generating machine and, for a long time, most people were unaware that Google was in fact the largest ‘advertising’ company in the world. The rest is history. Google’s clutter-free website still stands today as a testament of how successful their model is.

Facebook’s exponential growth
Along came Facebook. MySpace and Friendster already had millions of users. In a business of critical mass, that can and often results in an unassailable lead. Facebook kicked off with the premise of ‘exclusivity’ and relevance. In order to sign up, you first had to be a member of that particular school/college with the right email domain address. It became a platform for its users to find out what their classmates or dorm friends were up to. I mean come on: ‘Pokes’, ‘Relationship Status’, ‘Sending Sheeps’, and ‘Status Updates’ (newsfeed was to come later) – that was pure genius on Zuckerberg’s half!!!

While most of my friends were still on Friendster and MySpace (you know who you are), I had already defected to Facebook. Two years ago, I wrote about Facebook – why it deserves its valuation and more and why Google should be afraid. Everything I said has come to pass. For reasons as to why Facebook’s advertising monetisation is superior to Google’s read my earlier post.

 

Facebook really only came to dominate our daily tech news in 2008, when it crossed the 100 m user threshold. At the same time MySpace (which Murdoch paid $580m for in 2005 – Ouch!) was at its peak. Murdoch even tried to play a white knight in the Microsoft-Yahoo! struggle by proposing to merge MySpace into Yahoo! and save Yahoo! from Microsoft as long as Yahoo! agreed to value MySpace at >$10 billion. (Yahoo! was not that stupid.)

Facebook’s valuation grew exponentially. In terms of the sheer speed of its growth as a tech company, Google was eclipsed. I’ll be honest, I never thought Google would be unseated so quickly. I knew it would be unseated maybe 10-20 years down the line, but NOT in such a short space of time.

Groupon
Just when I thought the rush for multiple billion dollar valuations cannot come any faster than Facebook, along comes Groupon. I mean c’mon: talks of a $25 billion IPO valuation within two years?? I am just in awe. Like Facebook, which fended off a $1billion takeover from Yahoo! in its early days, Groupon turned down a $6 billion offer from Google when it was two years old! (Groupon almost failed before it stumbled on its current business.)

Groupon is a spinoff from The Point, which started life as a fund-raising site. It used a “tipping point model” whereby a threshold amount has to be crossed before there was any ‘deal’ – a feature that forms the premise of Groupon today.

You know why I like Groupon more than I like Facebook? Because of its simple Win, Win, Win business model. What is the Win Win Win I am on about? We first have to dissect the already simple Groupon business model.

You sign up to Groupon and you receive daily geo-located deals that are offered at cutthroat prices. The offers only last for 24 hours. Advertisers can afford to slash their prices on Groupon because of the volume of business it can generate in return. You on the other hand leverage your buying power by joining forces with hundreds or thousands of other buyers made possible by Groupon. In short, Groupon provides economies of scale to both sides of the value chain – Buyers and Sellers. Groupon magnifies the retained value for everyone.

I mean, how else would a freaking tiny Fish Pedicure business in London generate over 2000 paying customers in 24 hours? Sure, Groupon takes a cut. But it is great business for the vendor and great for the customers because they pay a fraction of the original price. Groupon has leveraged the power of economies of scale for the individual. Groupon users collectively have the purchasing power akin to large businesses and they enjoy a huge discount in return. Customers are happy with the bargain. Groupon is happy for taking a cut of the revenue. The businesses are happy because they enjoy more volume than they can cater for.

It is a Win for the consumers, a Win for Groupon, and a Win for the supplier (advertising business in this case).

Now that is a winning business model! How many business models can actually proclaim that? Look around you, how many businesses can claim that they are not ripping their customers off AND not twisting the arm of their suppliers AND instead are beneficial to them both AND YET still make decent money for itself?

It is the simplicity and effectiveness that amazes me.

In addition, Groupon takes this further. It encourages you (the user) to help it advertise by giving you credits towards your next (already wholesale discounted price) purchase. Once you have bought a discounted item/service from Groupon you have the chance to get your friends in on it. And with every friend you recommended that makes a purchase, you get free credits. It is an ecosystem that feeds on itself. With enough credits, you literally get freebies!! This is as close to a free lunch that you will get on Wall Street or any street for that matter.

Like Facebook and Google before it, “We want to know what our friends are doing”, “We value their recommendations more than plain vanilla advertising”. This emerging theme of “wisdom of the crowds” appears dominant across all three Google, FB and Groupon business models.

Financials
And now for the financials… Facebook already has a $70 billion valuation if Secondmarket figures are to be believed. But Groupon is talking about a $25 billion IPO this year at just two years and three months old!!

I will spare you the financial modelling details on how analysts justify those figures. One thing for sure is that the assumption of revenue growth must keep pace with projections. According to WSJ, Groupon is “projecting that the company is on pace to make $1 billion in sales faster than any other business, ever!”

Are we talking about a mania? A tech bubble all over again?? Well, it is always and only a bubble in hindsight – never in foresight. Because given what we know now and based on the funnymentals (uh I meant fundamentals), we would avoid the bubble if we knew it was a bubble! DOH!

From the tulips mania in 1600s to the South Sea bubble in 1720, up until the housing bubble in the 2000s – it was never a bubble until it burst. To quote the greatest stock operator that ever lived –

“There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again” – Jesse Livermore 1877-1940.

I have been raving about Facebook’s valuation. However, I think that Groupon might be slightly ahead of itself (just a tiny bit).

One thing that concerns me with Groupon is the fact that LivingSocial.com is snapping right at its heels. Although you could argue Facebook came from way behind to trounce MySpace. Secondly, perhaps more importantly, unlike Facebook, Groupon does not have that ‘stickiness’ factor. I would hazard a guess that most of you who read this probably spend more time on Facebook than any other site on the Internet (including Google)!!! Groupon on the other hand, you get in, get your shit and get out.

I would go way out on a limb here and say Groupon’s rush to IPO is to cash in on what they ‘know’ is a replicable model. In other words, Groupon, LivingSocial.com and other social buying sites are cannibalising each other (even though they have created this new ocean for themselves). Plus, both Groupon and LivingSocial advertise on Facebook, thus driving up ad prices, which will only benefit Facebook.

Strategy wise, Facebook seemed to have really positioned itself to capture and monetise the migration of our social lives onto the Internet. Then again, Google’s success was a black swan, so is Facebook’s and now Groupon’s. I look forward to the next big idea…

UPDATE: I have always maintained that the next big tech company will be one that facilitates the migration of our lives onto cyberspace. When pundits were saying that Facebook was just another Friendster, MySpace or Bebo and MSFT overpaid, I knew they were wrong. I argued that if Zuckerberg wanted he could literally incorporate Skype, EBay or payment services into Facebook. Facebook can do to Amazon and EBay what Apple did to everyone else. Like Google’s vision statement of organising the world’s information, I think Facebook is quietly positioning itself to organise our digital social lives. The latest upgrade on Facebook takes us one small step closer. It has combined chat with email to facilitate our evolving online communication preference. It has a history of all our chats, emails, places, friends, status updates and whatever you care to put on it. It literally owns your social life! Furthermore, Zuckerberg is young and savvy enough that he does not have the corporate America image (yet), so if China friends Facebook all bets are off…

Update 2: As of August 2011, I have now turned around and think Groupon’s biggest mistake is to turn down an offer from Google. I would short Groupon all the way to zero if they ever went public. Great concept, poor execution.

 

 

Facebook’s $ 50 billion dollar question

January 18, 2011 6 comments

I posted an offhanded remark on a Wall Street Journal article regarding the Goldman Sachs – Facebook deal and it received a lot of recommendations. As such I am reposting it on my blog.

When a firm gets to a certain critical mass, governments take interest. If the SEC is not doing something about it, rest assured the EU is waiting. We’ve seen Bill Gates take on the government and lose, the same with Google. Now it is Facebook’s turn.

Facebook is doing a much better job as repository of data and information on citizens than governments who traditionally held that role. The Head of FBI knocks on Zuckerberg’s door because Facebook’s database is better than the FBI’s. Think about it, we have this little booklet called a passport and when we travel we get little stamps on them at certain checkpoints in a country. This will prove where you’ve been. Facebook not only knows where you’ve been, it has pictures of you and your friends, what you did, what your thoughts were at that moment. Those of you who have used ‘Facebook Places’ will know that Facebook even has up to date information on your location, your status update, and possibly what you are thinking of doing next. This information is stored ‘forever’ and can be accessed at the speed of light! And the beauty of it all – it knows this information because YOU uploaded it!

I can easily see $100 billion valuation within 36 months; it is in a blue ocean in terms of growth potential. Remember, buy the rumour, sell the fact.

Being the last of Generation Y (same age group as Zuckerberg), we are one of the last generations who remember life before the Internet. And as a full Web 2.0 generation, I know of a simple litmus test that can justify the $50 billion valuation right now. How much time do I spend on Google? An awful lot; it is indispensable. How much time do I spend on Facebook? Answer: a lot more time than I spend on Google. Not because I have to, but because I want to. It may not say much about my generation, but it says a lot about ‘Facebook Effect’.

On a side note, Goldman Sachs went down one notch in my book. They are no longer the smartest guy in the room considering how they handled the Facebook deal. GS is blaming investors for the leak and investors are blaming GS for the leak. It is ironic that GS did not see it coming. After all, Facebook and Zuckerberg’s mantra is about empowering people and encouraging us to SHARE information…

With regards to their current sky-high valuation of $50 billion and stratospheric price-to-earnings ratio, consider this – before Facebook came along, Google was the number one advertising firm in the world. That’s right, it is Google, not some Madison Avenue firm. Google’s genius in terms of monetisation was its ability to sell adverts based upon our search query. It had the critical mass and it was the largest search engine. Advertisers pay a premium to ensure that their adverts reach their targeted demographics. Google’s analytics can provide pretty accurate information about its user even though most of it is guesswork. Over time, Google built a database of its users’ surfing habits and tailored the adverts accordingly. Therefore, advertisers continue to pay a premium for this.

Now consider Facebook. Facebook knows exactly who you are, your age, your background, the school you went to, your music taste, your likes and dislikes, your interest groups, even your vocabulary and etc. How? Because you TOLD it. Unlike Google there is no guesswork involved. This is an advertiser’s dream! If you wanted to advertise only to women in Timbaktu between the age of 23 to 55 who herd goats, supports Obama and listen to Metallica – technically, you can.

So in terms of Facebook’s ability to grow and monetise this, if the past is any indication of the future and Google became what it is now primarily through ad revenues, then there is no reason why Facebook cannot hit $100b within the next 36 months. Facebook has already overtaken Google as the most visited site in the US. Only three years ago, who would have thought Facebook would hit every important milestone faster than Google?

When the Web arrived in the early 1990s, it went mainstream. The number of people on the Internet exploded, from 2.6 million in 1990 to 385 million in 2000. Facebook went from nil to 600 million users in about half that time…

More than a year ago I wrote a post on Facebook. Everything I said has come to pass. Remember when Zuckerberg turned down $1 billion from Yahoo, everyone said he was crazy. When it was valued at $10 billion by Microsoft, everyone said MSFT grossly overpaid. When it was valued at $25 billion by Russians everyone said the same thing – overpriced!. Now at $50 billion everyone is saying the same thing AGAIN, yet investors are throwing money at it like there is no tomorrow. My guess is when it hits $100 billion everyone will still be saying the same thing.

Remember the cardinal rule of Wall Street: Buy the rumour, sell the fact

See also: http://davidwong.co.uk/2009/11/08/no-business-plan-no-problem/

UPDATE: Two months after this blog post was first published, Secondmarket valuation of Facebook exceeds $70 billion (so much for 36 months.)

Update: On Facebook IPO with a $100 bn valuation my ‘call’ proved to be true. I shorted Facebook, got filled at 41!!, took profits at 38, thinking Morgan Stanley would support the IPO price. They didn’t and it crashed without me. I shorted again in low 30s, held it all the way to 18. When asked when I would stop shorting Facebook, I replied 17-18, which really meant that is when I am taking profits. This again came true. I think FB really should be 12-15; investors are unwilling to cut their losses so it will take time to get there. It will be volatile, but in the low double digits is where I peg FB (as of Aug 2012). However, due to margin of safety, I won’t short above 20 and this was my trade of the year… everything worked to plan. If only I had a way of getting in early, I would have rode it all the way up and shorted it all the way down…

What you should know about the Facebook Juggernaut

November 8, 2009 3 comments

facebook-logoMark Zuckerberg, founder and CEO of Facebook, debuted on the Forbes billionaire list with a $1.5b net worth, then dropped off when the economy turned sour.

Zuckerberg was quickly dubbed the next Bill Gates. Apart from the obvious similarities that they both dropped out of Harvard, both are in the tech sector and they both had been accused of gaining initial success from software codes written by someone else (Microsoft with DOS, and Facebook with ConnectU), they both share a lot more less obvious similarities.

Both Gates and Zuckerberg enjoyed creating computer programs and playing computer games in school. Both had professional parents (Gates’ father is a lawyer; Zuckerberg’s father is a dentist). And, both attended exclusive, private secondary schools.

Now Zuckerberg is back on the Forbes list with a $2 billion valuation from his 20% stake of Facebook, as the company he founded accepts $200m from a Russian investment group.

With 300 million registered users (and millions joining every month), and the countless hours we spend on the site every day, Facebook’s monetisation programme might just prove highly successful.

Facebook has already overtaken YouTube as the third most popular site on the Web. It hit all the important milestones faster than any company before it. Facebook also launched a new real-time search engine, a clear jab at Google.

Facebook has always been in a position to take a lead in real-time and social search because of the sheer amount of data the site has collected about what people are doing, the things they’re interested in, and what their social graph looks like. Paul Buchheit, the founder of FriendFeed, said the human link data at sites like Facebook “could ultimately be more valuable than the link data from the web” that Google’s search engine is based on – someone just needs to mine it.

Zuckerberg, an uber-geek, has been described as being “oblivious” and a “boy in the bubble” by Rolling Stone magazine. Regardless of what has been said, anyone who has met venture capitalist luminaries in pyjamas just because he could, and had “I’m CEO, Bitch” written on his business card, commands respect.

One thing that bugs me is the question of “How did Google let this happen [Facebook get away with it]?”. Google is a company with the keys to the “library of Alexandria” and the ability to technically render “two Sat-Nav companies worthless” by providing its services for free.

If Google couldn’t stop Facebook, who can?

The smart money is already betting that he is the next Bill Gates. History will look back and say: Gates and Microsoft revolutionised the way we use computers, whilst Zuckerberg and Facebook revolutionised the way we social network. When Facebook goes public, it will be a big payday for a lot of employees.

Can Facebook unseat Google as the new darling of Silicon Valley?

No Business Plan? No Problem

November 8, 2009 2 comments

Can you really follow the mantra “Build it and they will come”? Apparently, yes, you can. Gather a large following first, then figure out how to monetise it later. YouTube did it, Facebook did it, and now Twitter is going down that same route.

Twitter recently closed another round of funding which values the company at one billion dollars. The only problem is there is “no clear” business plan, or at least that is what the media would have us believe. A simple Google search on the keywords “Twitter business plan” returned 275,000,000 results. I guess I am not alone when it comes to the obsession with Twitter’s plan to make money.

Sound like the ’90s dotcom boom? Well, not really.

If the ’90s dotcom boom taught us anything, it is, IPO first, make money later. The problem is they all had a “plan”, they just did not keep to the plan.

If YouTube, Facebook and Twitter are going to teach us anything, it is to build a large following first, make money later. Even though they had “no plan”, they are all making money (except Twitter for now) or show great potential to.

Moral of the story: most business plans are not worth the paper they are printed on (or the hard disc they are ferromagnetically etched on)

Leaked documents show Twitter is hoping to be the first to one billion users, and, in their own words, to become “the pulse of the planet”,

Think Google and Facebook are gonna sit and wait and do nothing? (Forget Microsoft, Bill Gates is too busy redistributing his wealth now that he’s retired.)

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