Fagan Associates Archive for February, 2012

If you’re not a sport fan and specifically a basketball fan, perhaps you are not familiar with the emergence of Jeremy Lin, who prior to coming off the bench and leading the former doormat New York Knicks to seven consecutive victories, he was spending nights sleeping on his brother’s couch in a small apartment in New York City.

Despite being the High School Player of the Year in the State of California, Jeremy Lin went unrecruited by any major schools and ended up going to and subsequently graduating from Harvard with a degree in economics and a 3.1 grade point average.  Despite being first-team all IVY League, Jeremy Lin then went undrafted in the NBA draft and had to sign on as a free agent with the Golden State Warriors in 2010 and after mostly sitting the bench ended up with the New York Knicks at the start of the 2011-2012 season where, at the beginning he sat the bench until opportunity knocked.

Having scored at least twenty points and dished out seven assists in his first six starts, Lin is in very select company that includes only fifteen players since the 1985-1986 season.  Now, the toast of the town, Lin’s nearly unbelievable story is one of rags to riches (at least for the time being) and can teach all investors some valuable lessons.

FIRST and foremost, always think critically.  Think for yourself.  Don’t believe everything you see, hear or read.  Don’t assume anything.  Jeremy Lin is the first American born NBA player of Chinese or Taiwan descent.  Perhaps this clouded the perception of the scouts who evaluated Lin.  Similarly there were those investors a few years ago, whose perceptions of companies like General Electric, Intel, IBM and Citigroup were clouded.  They thought that if they just ‘bought and held’ without consideration of almost anything, they would be alright.  That didn’t happen.  Investors must always look to upgrade their portfolios regardless of name.

SECOND, stay humble.  Arrogance leads to nothing good when it comes to investing.  Always believe that you don’t know everything about your investments.  Continue to look for information and always believe there is something negative lurking around the corner.  Try to find out what that “something” might be.

THIRD, stay hungry.  Stay on the offensive.  Don’t settle for average.  Stay on the lookout for better ideas.  Always look to upgrade your portfolio to something a bit more appropriate for your needs.  That doesn’t mean that you should be impatient or trade-happy.  It means that you should always have your antennae up for better ideas.  Don’t ignore them.

FINALLY, within reason and moderation, give your ideas a shot.  Have a strategy for selling as well as buying.  The Knicks gave Jeremy Lin a shot and then took a wait and see attitude.  As long as he was performing they kept playing him.  Stocks work the same way – as long as the holding is working let it go, all the while continuing to learn about the holding, it’s positive and negative qualities.  However, should the holding begin to go down, have a plan and execute it.

THE BOTTOM LINE – When investing, think critically, stay humble, stay hungry and have a strategy.

Ever since word spread that Facebook was filing to become a publicly traded company, we have been receiving many requests soliciting our opinion.  Given the fact that it will be three to four months prior to Facebook trading, it would be premature to weigh in with an opinion.  Many questions still remain.  However, there are some known facts that we will weigh in on.  They include.

According to the Registration Statement (Form S-1) filed with the Securities and Exchange Commission, Facebook had 845 million Monthly Active Users (MAU) as of December 31, 2011 as compared to 608 million MAU one year prior for an increase of 39%.

Facebook had 483 Daily Active Users (DAU) as of December 31, 2011 as compared to 327 million DAU one year prior for an increase of 48%.

Facebook had more than 425 million MAU who used mobile devices as of December 2011 an area of their business that is one of the fastest growing.

Facebook users generated an average of 2.7 billion Likes and Comments per day during the three months ended December 31, 2011 and uploaded more than 250 million photos per day.

Revenue at Facebook increased by 88% to $3.711 billion during calendar year 2011 from $1.974 billion one year prior and by 2,325% from $153 billion during calendar year 2007.

Expenses at Facebook increased by 98% to $2.711 billion during calendar year 2011 from $1.368 billion one year prior and by 831% from $291 billion during calendar year 2007.

The net result when comparing revenue increases at Facebook relative to increases in expenses is a profit margin of approximately 27%, slowing from prior years but nonetheless healthy by most standards.

Approximately 12% of the revenue Facebook generated during calendar year 2011 was from its’ relationship with gamemaker Zynga (ZNGA).  This revenue is from direct advertisements purchased by Zynga as well as sales of their virtual games.

Facebook shares currently trade in a private market for approximately $30 per share, which would imply a market capitalization of approximately $75 billion, more than the Walt Disney Company, General Motors and Nike.

Should Facebook come public at a market capitalization of $75 billion, it will therefore be trading at nearly 19 times revenue, this as compared to Apple and Google, which trade at approximately five times revenue.

When Facebook becomes public, co-founder Mark Zuckerberg will maintain his iron grip on the company with a 28.4% outright ownership and 57.0% of the voting rights.

Rather than bore you to death with more data, let’s just take a wait-and-see attitude regarding our opinion on whether or not the shares are worth purchased.  It has yet to be determined how many shares Facebook will ultimately issue and at what the issue price will be.  Keep in mind that if this Initial Public Offering is like the vast majority of others, nearly 90% of the shares will be taken by large institutions and insiders with the general public getting the balance.  Demand will certainly exceed supply so the first trade will most likely be WAY above the initial public offering price.

We will keep an eye on this popular Initial Public Offering as its trading debut nears.