Skip the Facebook IPO unless you can buy it at the pricing range of $28-$35 , says BTIG analyst Rich Greenfield, in a big report (paywalled).
Based on Greenfield’s model, he thinks the company will be trading at $41.50 in twelve months, therefore buying the IPO at the high end of the range won’t deliver a great return.
The biggest problem with Facebook from Greenfield’s perspective is that we just don’t know what’s going to happen with the company in the near future.
He notes that the world is moving to mobile applications and Facebook has zero advertising there. He also notes that Facebook’s current desktop based ads are pretty crummy. His exact words: “Given the generally unexciting quality of Facebook advertising today, it is actually amazing that the company is set to generate nearly $4 billion of advertising revenue globally in 2012.”
How Facebook deals with both of those challenges will determine its business in the long run.
Here is the key section of Greenfield’s note on Facebook:Unfortunately, valuing Facebook is more art than science at this stage of its development and the current state of online advertising. Given the generally unexciting (and we’re being kind, see the screenshot from our Facebook account embedded to the right ) quality of Facebook advertising today, it is actually amazing that the company is set to generate nearly $4 billion of advertising revenue globally in 2012. Every company wants to take advantage of social and build a direct relationship with consumers, leading everyone to want to work with Facebook. That leads to experimentation and in turn, significant revenues for Facebook. Evolving from what you see in the screenshot on the right to the aforementioned integrated, “living/breathing,” campaigns that take full advantage of the Facebook platform and the web more generally will take time – meaning years.
At the same time that companies are “learning” to harness the power of Facebook (involving time, strategy, creativity and money), mobile is rapidly taking share, not just of Facebook usage, but of all consumer time spent on the Internet. Up to 10% of total Internet usage is now mobile more than doubling 2010 levels, according to recent blog post on thenextweb. While we “poke fun” at the quality of Facebook display advertising today, mobile advertising is at an even earlier stage of development, with Facebook having only recently introduced sponsored stories and offers on mobile devices (smartphones and tablets). To be honest, we are not even sure what forms mobile advertising will ultimately take due to screen/display space (vertical blocks of display ads like you see above-right are difficult to imagine in a mobile Facebook product). However, we believe the rapid shift to mobile consumption will force brands to work even harder to build branded content that drives organic consumer conversation (earned media).
BTIG’s Facebook Forecasts: Our model assumes Facebook advertising revenues exceed $8 billion by 2015, compared to the nearly $4 billion estimated for 2012. The size of Facebook’s reach and the lack of maturity of Facebook’s advertising today, gives us confidence in the long-term growth potential (particularly when viewed through the lens of a $25 billion plus global display ad market today and a $400 billion-plus overall global ad market). Yet, the timing/speed of growing from today’s $4 bn could prove less of a linear equation than we have illustrated, given the early stage of social advertising and the nascent state of mobile ads.