The Facebook IPO, Are You An Insider or An Outsider? - Part 1

Were you in bed? Perhaps playing video games? Or maybe stock trading, the day financial history was made when the viral-like initial public offering (IPO) of Facebook (FB) took place on the NASDAQ? It was the second largest IPO ever behind Visa and the largest ever for an internet firm even surpassing Google (GOOG)! In the lead up to last Friday, I discovered two types of people, insiders and outsiders.

The insiders seem to be those who are critical of FB and see it for what it is and / or skeptical about the process, valuation, and tend to have a more analytical approach. The outsiders however, tend to be excited about the potential of FB or even as far as cult-like in their adoration of the company. They focus on growth and rely on more unproven methods of valuation.

This two-part series is going to summarize what I found in my research this past week.

So what does an insider know?
• Who the syndicate is and that they made 57% of the profits at an average price of $1.11
• That a Greenshoe Option was invoked, increasing shares by 20% two days before the offering

How do they view the valuation?
• As Henry Blodget points out...

  Google's revenue is also 10X as big as Facebook's and Google has more cash flow than Facebook has revenue. But the market is valuing Facebook at 1/2 of Google's value.”

• As of this writing, FB price to earnings ratio is 122 while the likes of GOOG and Apple are 18.2 and 12.3, respectively
• The search volume function now shows FB to be only relatively higher than MySpace in 2K7 but its shape is alarming
• Revenue growth declined from over 100% in MAR 2011 to just over 45% by MAR 2012

What evidence do they have?
• Three days before the IPO, General Motors and Proctor & Gamble withdrew their efforts and CEO Martin Sorrell from WPP, which spends about $400M on FB, has “fundamental doubts” about advertising and Kia Motors agrees
• Widely reported that Mark Zuckerberg has made clear, a willingness to sacrifice business performance for his social mission

An insider then knows who’s making the real money. They believe that what is being reported is incomplete and look at more meaningful metrics and see changing trends as well comparative valuation putting FB into perspective. They see that major clients are starting to leave or questioning their ability to deliver said results. They even apply their own unique analysis and conclude that the market will likely further de-value them accordingly.

With that said do you believe in Facebook or are you an insider?

If you're not, then are they just being too bearish or over-analyzing?

Let us know what your opinion is, persuade us, and...stay tuned for this week's second installment of the Facebook IPO when I share the outsider perspective .

Sources: Business Insider, Finanical Dictionary, and ZeroHedge, May 2012