Is Facebook worth the price? Analysts split - msnbc.com (blog)

AP

Facebook CEO Mark Zuckerberg broke out a suit and tie for a meeting with Japan's Prime Minister Yoshihiko Noda this year.

As Facebook nears its debut as a public company, would-be investors are pondering the $96 billion question: Can an eight-year-old company run by a hoodie-wearing 28-year-old possibly be worth that much?

Analysts are divided, with some suggesting that the valuation is simply too high, and others coming up with scenarios in which Facebook could be worth even more, given the right conditions and a leap of faith.

Andrew Sheehy, chief analyst at British-based Generator Research, says the number is too high, reflecting outsized expectations for the social networking company. A market cap of $100 billion would give Facebook a price-to-earnings ratio five times that of Apple, the nation's most valuable company. Apple clocks in at about 20 times earnings, based on its most recent fiscal year, while Facebook would be valued at 100 times its $1 billion in annual earnings.

Such P-E ratios are a typical way investors measure the value of a company, although they also have to factor in the rate of a comapny's growth. But even if Facebook profits grow rapidly it will be years before its P-E ratio comes down to the level of other tech companies.

Morningstar analyst Rick Summers offers a preliminary valuation of $71 billion for the company and forecast a growth trajectory that would bring Facebook up to $40 billion in revenue by 2021, from $3.7 billion last year.

Related: A non-investors guide to Facebook's IPO

"Facebook’s ownership and control of its user data affords it substantial competitive advantages," he wrote in a recent research note. "Within Facebook, the company continues to build a rich database of friends, actions, demographics and applications."

Most of Wall Street's top tech industry analysts are barred from commenting on the offering because they work for one of the 33 investment banks underwriting the massive offering, which is expected to be priced Thursday and begin trading Friday on the Nasdaq stock market.

That leaves investors largely on their own, especially since most individual investors will be unable to buy shares until they begin trading publicly, when they easily could be far more expensive than the initial public offering price, which will value the company at an estimated $77 billion to $96 billion, according to the latest documents filed with federal regulators.

Facebook's 900 million-plus user base is far and away its biggest asset. It represents a huge number of eyeballs for exposure-hungry advertisers, along with a vast warehouse of data about users' online behaviors, preferences and habits. The company has done a good job of turning that data into dollars so far but will have to invent new ways to make that data generate revenue to justify such a rich valuation, analysts said.

Facebook recently raised eyebrows by reporting quarterly profits that were below year-ago levels, although revenues rose 45 percent.

"Growth is decelerating, but it's decelerating from enormous down to large," said Barry Randall, chief investment officer at Crabtree Asset Management LLC. "Its major problem now is managing people's expectations."

Summers, of Morningstar, acknowledged that the IPO hype glosses over some shorter-term issues with which Zuckerberg and his team will have to deal. "The market may be underestimating several near-term challenges for the company," he wrote.

Some analysts voiced concern that the rapid increase in Facebook's mobile traffic will continue to erode ad revenues. In March, the company had 488 million mobile users, which presents a challenge because the small screen size of smartphones means much less real estate for ads.

In an amended filing with federal regulators last week, Facebook said, "Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results."

"The rapid shift from online usage to mobile devices that are harder to monetize is harming Facebook's growth prospects in the near and medium terms," Sam Hamadeh, founder and CEO of PrivCo, which does research on privately held companies, said in a report. Even analysts who are more positive agree that growth is slowing.

Related: Facebook sees growing shift to less lucrative mobile use

In a research note in response to Facebook's recent disclosure of weaker revenue numbers, analyst Ken Sena at Evercore Partners lowered estimates for revenue and earnings margins, although he still said the company was worth $130 billion to $150 billion.

Even if Facebook figures out a way to tuck ads into smartphone news feeds without alienating users, Sheehy said relying on online ads isn't going to be enough. "They have done a very, very good job at executing target advertising," he said, which is why Facebook was able to generate what Sheehy, of Generator Research, called its "tremendously impressive" $3.7 billion in revenue last year. 

"But it's just not going to scale," he said. Even if Facebook triples ad revenue to $12 billion by 2016, that's nowhere near enough to justify a $96 billion valuation, he said. To do that, "They'd have to develop a completely new incremental business."

Analysts have plenty of ideas about how Facebook could do this. Morningstar's Summer pointed out that the site has already morphed from a social destination to an identity for users to log into other websites. It's also a platform for a growing slate of apps and layered networks like BranchOut, which Randall suggested could become a revenue stream in the future.

Related: On Wall Street, it's shaping up as hoodies vs. the suits

Eventually, he predicted, "They'll monetize it by allowing smaller companies to build businesses on top of their database and eventually charge them for doing so." The site also does a robust business in the sale of virtual goods, which could be the first step into selling physical goods and expanding into the burgeoning e-commerce and payments arena, following in the footsteps of eBay.

It's not impossible. Apple grew faster than Facebook would need to in order to justify a $96 billion valuation, but Sheehy pointed out Apple also revolutionized both the music industry and the mobile phone market. That sets the bar high for Facebook.

Evercore's Sena has faith.

"We believe that Facebook's ad model is only now just beginning to reflect the power of its audience platform," he wrote. "Moreover, while we continue to believe that Facebook will redefine advertising and that the company is on course to be the most valuable media company in existence."

{"contentId":"11702548","totalVotes":"50"} Is Facebook worth $100 billion?

Don't count on Facebook's Mark Zuckerberg dumping his trademark hoodie, reports CNBC's Jane Wells. Rob Enderle, Enderle Group and David Kirkpatrick, author of "The Facebook Effect," debate over whether Zuckerberg is Facebook's biggest weapon or bigges...

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Boeing concept jet could be Prius of the skies - msnbc.com

18 hrs.

John Roach

In 2050, flying commercial may still mean crammed overhead bins and crummy food, but the engine could be powered by liquefied natural gas or electricity, according to an ongoing study on the future of flight.

Such planes might also be constructed with lighter materials, sport high-span truss-based wings, and be routed with improved air-traffic control systems, according to Marty Bradley, a technical fellow with Boeing Research and Technology who is the leading the NASA-funded study.

“We’re not really betting on any one of those [technologies] in particular, but we are identifying some future possibilities and then trying to make sure that the technology is developed far enough along so that they can be ready if they make sense at the time,” he told me Wednesday.

An energy-efficient commercial jet powered by a hybrid-electric engine similar to those in cars such as the Toyota Prius, Chevy Volt, and Nissan Leaf is among the more compelling possibilities identified to date, Bradley noted.

Such a plane, dubbed the Sugar Volt, would plug in at the airport to recharge batteries, for example, in the same way Leaf owners recharge in their garages. Conventional fuel would likely help it get off the ground. Once airborne, electricity would supply at least some of the power to the engines.

Batteries – the source of the electricity – are “the biggest challenge in making this concept work,” Bradley said. 

They are heavy compared to conventional fuel and likely will be for the foreseeable future. Weight – how much of it planes have to carry – directly impacts how much energy they need, of course. That’s part of the reason, for example, that you get charged extra for heavy baggage.

“There is a penalty for carrying heavy batteries,” Bradley said. “But if you have a really efficient airplane, that penalty is reduced. So, in the study, we make the propulsion system more efficient, we make the aerodynamics more efficient, we make the airplane lighter.”

This engineering work, in turn, could translate to a plane that requires 50 percent less energy to fly than today’s commercial jets. And that means the battery only needs to be about half as big.

A similarly designed plane could also be powered by liquefied natural gas, Bradley and his colleagues have found in the course of the SUGAR study, which stands for Subsonic Ultra-Green Aircraft Research.

Challenges for liquefied natural gas are primarily the fuel tanks on the airplane and re-fueling infrastructure at the airport, Bradley noted. “Once you inject it into a jet engine, it actually burns really well,” he said.

The advantages to using liquefied natural gas include what may be low cost due to abundance and its lower greenhouse gas emissions compared to conventional jet fuel. 

Whether or when any of these technologies are in commercial jets in the future depends on what the future looks like – the availability of natural gas or biofuels, for example, or whether there are limits on greenhouse gas emissions to combat climate change.

“We’re not quite sure what future we’re going to have,” Bradley said. “So, we’re in the business of getting different technology opportunities for the future.”

John Roach is a contributing writer for msnbc.com. To learn more about him, check out his website and follow him on Twitter. For more of our Future of Technology series, watch the featured video below.

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Weak computer sales trim Microsoft 3Q profit - msnbc.com

Microsoft Corp beat Wall Street's profit forecast as personal computer sales held up better than expected, lifting its shares 2.5 percent after hours.

The results buoyed optimism around the world's largest software maker, which is lining up a new tablet-friendly version of Windows for later this year and is looking to make a dent into Apple Inc and Google Inc's domination of the mobile market this holiday shopping season.

"The results were a fair amount better than we were looking for," said Rick Sherlund, an analyst at Nomura Securities. "Overall revenue growth was 6 percent, and this is before the new product cycle, which should come around October."

Microsoft - whose shares hit a 4-year high of $32.95 last month - has not said when its Windows 8 system will be released, but most in the industry expect it on devices from around October, offering an alternative to Apple's runaway iPad. New Windows smartphone software is expected around the same time.

"Next year at this time we should be talking about Windows 8 mobile and how it's contributing or not to the company," said Kim Forrest, analyst at Fort Pitt Capital Group. "But we really need Windows 8 to come out on all devices, to see if it's going to have that synergy or not."

The Redmond, Washington-based company reported fiscal third-quarter profit of $5.11 billion, or 60 cents per share, compared with $5.23 billion, or 61 cents per share, in the year-ago quarter when it posted a one-time tax gain.

Profit beat analysts' average forecast of 57 cents per share, according to Thomson Reuters I/B/E/S.

Sales rose 6 percent to $17.41 billion, driven by strong demand for its server software products and Office application. Analysts had expected sales of $17.18 billion.

Worldwide personal computer sales rose a modest 1.9 percent in the quarter, according to tech research firm Gartner Inc. That was better than expected in a market facing hard-drive shortages from Thailand and the onslaught of Apple Inc's iPad.

That helped Microsoft, which supplies the operating system for 90 percent of PCs, to post a 4 percent increase in sales of Windows, still its main product.

"The Windows beat was a positive surprise, looking at about 4 percent growth, versus expectations for about a 4 percent decline," said Josh Olson, an analyst at Edward Jones.

"We also had solid business and server performance as well. The Big Three, if you will, in terms of the revenue drivers, were all a little bit better than expected, with Windows a lot better than expected."

On the downside, Microsoft's usually profitable entertainment and devices unit posted a quarterly loss due to falling sales of its aging Xbox console and increased research and marketing costs for its new Windows smartphone software.

"There was weakness in entertainment and devices," said Sid Parakh, an analyst at McAdams Wright Ragen. "If that were to have come in in-line, it would have been a pretty nice beat."

Traditional console sales are down across the board this year - hurting Microsoft, Sony Corp and Nintendo Co Ltd - as Apple's iPad and other tablets grab a slice of the lucrative market.

Microsoft shares rose to $31.87 in extended trading, after closing at $31.01 on Nasdaq.

The stock is up 20 percent so far this year, outpacing the tech-heavy Nasdaq's 16 percent gain, and a 10 percent rise in the Standard & Poor's 500.

But it is still below levels of 10 years ago, as investors worry about the company's ability to match Apple and Google in online and mobile technology. Apple's market value is now comfortably twice that of Microsoft, and its sales of iPhones last quarter exceeded Microsoft's overall revenue.

Microsoft is the cheapest of the big tech stocks, with a price hovering around 10.7 times expected earnings for the next 12 months, or about 14 percent lower than its peers, according to StarMine.

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