We are pleased to present our interview with Nancy Miller, the author of a new best-seller, The Facebook IPO Primer. Nancy was a journalist for several large publications before taking off to raise a family. Nancy was kind enough to sit down and talk about her book on possibly the hottest IPO ever. Her full bio can be found at the bottom of this article.

Can you tell us a little bit about your background?

I got my first job as a financial journalist by answering an ad in the New York Times. Now how likely is that to happen ever again?  So I landed at Knight-Ridder Financial News where I learned the difference between a stock and a bond. My first big scoop was about Merrill Lynch losing about $400 million on a single trade in derivative mortgage securities. Sound familiar? I later worked for USA Today, covering real estate and markets. And I was the first American to run a newsroom for a joint venture of Nikkei and QUICK Corp of Japan. It was a great project –real-time news on a proprietary quote box. But somehow they ran out of money. I took more than a dozen years off to raise a family and now I’m back freelancing.

What encouraged you to write the book?

Mitchell Brown at ewallstreeter – a news curator – called and asked if I would write an insta-book on the Facebook IPO. I thought about it and realized it was a great opportunity to teach investors about the stock market and how IPOs work through the Facebook story. An incredible business tale in its own right.

 You warn about investors getting in too late and paying a premium for the stock, do you think the company is over-valued?

That’s an incredibly interesting question – especially given the updated filing with the SEC. Revenues and earnings in the first quarter of 2012 slipped compared to a year earlier. That’s pretty surprising for a company that should still be in a growth mode. When Google Inc (NASDAQ:GOOG) went public, it was still going gangbusters, doubling revenue and profits. It was also much bigger even then. It’s first quarter, by the way, was stronger than Facebook’s.

I was trying to warn investors in my book about buying on the first-day pop. When a company like Facebook sells stock for the first time to the public, the trading can get crazy. LinkedIn Corporation more than doubled its price on the first day of trading. Then the stock sagged before rallying back to the price of its first day close. Studies show that buying on the pop is a losing strategy. But if you can get the stock at the initial public offering price, and you like the company, it’s a much more reasonable investment. No guarantees, of course.

You mention Myspace, do you think Facebook has a stronger moat than Myscape did? Can Zuckerberg go wrong like NewsCorp did with Myspace?

Facebook is in a much stronger position than MySpace. It has created a platform that is formidable with an incredible ecosystem of apps and connected websites. MySpace didn’t that.  But that doesn’t make Facebook invincible. Facebook isn’t making any money yet on its 488 million mobile users – more than half of its total 901 million and the fastest growing part of its user base. It just launched sponsored stories for mobile users, but it’s not clear how much money Facebook can earn from that.

This is where recent purchases of Instagram comes in. It was born as mobile company and users loved it. Instagram doesn’t earn any money. It’s much smaller. Everyone is saying that Instagram—which has just 35 million users – was a threat to Facebook.  In the US, at least, you don’t hear about people loving Facebook.  There was even chatter that it could bypass Facebook as a social media force.

So Mark Zuckerberg, lone wolf style, negotiated to buy the company for more than $1 billion. It’s insane unless you realize just how vulnerable all high tech companies are to competition.

 Zuckerberg de-facto controls the company, isn’t investing in the IPO therefore investing in Zuckergberg?

Absolutely. It seems to be a tradition among media companies. It’s not heartwarming for advocates of stockholder rights. But if Zuckerberg turns out to be Warren Buffett, he’ll get a pass. But if he stumbles, watch out.


Who is Facebook’s main competitor? Google?Apple? Twitter?

They all are competitors, though most people view Google Inc (NASDAQ:GOOG) as the most dangerous. Google is in advertising and search; it’s trying to compete in social media with Google+ – thought that hasn’t gained much traction. And Google Inc (NASDAQ:GOOG) is also competing with Facebook for games now, offering a Facebook style Credits system too.  Meanwhile, Facebook is trying to out-Google Google with social search through its partnership with Microsoft Corporation’s (NASDAQ:MSFT) Bing.

And by the way, in its s-1, Facebook doesn’t mention Apple Inc. (NASDAQ:AAPL) as a competitor but it does mention Microsoft Corporation (NASDAQ:MSFT). They are all competing for eyeballs. And Apple Inc. (NASDAQ:AAPL)? Just last night, some folks on Twitter were speculating that it would buy the social network Path and give Facebook a good run. Or maybe Google would buy it.

Do you think increasing privacy concerns are an issue which should worry investors?

Privacy issues are huge for Facebook. I think that’s part of its vulnerability. And it’s what makes a company like Path, which puts a higher premium on privacy, so attractive. One thing we learned from MySpace is that a lot of people can change their minds about what is great pretty quickly.

What do you think about the Instagram acquisition?

It makes total sense though I personally was irked. I was one of the million folks who downloaded IG to my Android when it went live the first day. I don’t like the idea of warehousing everything I do on one site.

Instagram really drove home that Zuckerberg is steering the Facebook ship and that he will pursue what he wants without consulting his board or closest advisors – at least that’s the way the Wall Street Journal tells the story (a really great scoop, too!).

You talk about how Facebook actually makes money, most people are unfamiliar with this topic, can you explain?

Advertising is the biggest money maker – about 85% of revenues. And Facebook is working to milk the data it has on its user base to help advertisers target their audiences more precisely. That’s considered money heaven. But Facebook is struggling. In the first quarter, the average cost of revenue was stagnant, which is surprising. In the first S-1 filing, Facebook defended the drop in the number of ads in the US because it was raising rates. This was a clear strategy.  The new numbers show just how tough things are out there. At Google in the first quarter, the average cost per click fell 12%. Nonetheless, Google outearns Facebook by a 6-to-1 margin.

Depending on your view, that means Facebook has a lot of potential but also a lot of work to do. Arcstone Equity Research says Facebook’s  advertising toolbox is pretty unsophisticated compared to that of Google’s But they are sprinting to catch up.

It’s important to remember, however, that Facebook isn’t just about advertising. Facebook Credits – the virtual currency used to play games and buy virtual gifts – is hugely profitable. Facebook even hints that it may try to broaden the use of credits. In my book I mention that Facebook could become a virtual bank, rivaling Paypal in the payments area. The margins would be thinner – Facebook gets up to 30% for gaming fees. But the customer base would be much, much bigger. Right now, Zynga dominates.

Social search is another potential area to draw in more dollars. But execution is everything.

Even the bulls acknowledge that the PE of Facebook will be 42 in FY2014, that’s very high, especially compared to comps. Thoughts?

I don’t think P/Es are all that meaningful for companies that are in a big growth phase. But that said, the jump in expenses and slowdown in revenue growth is a concern. Generally, I would consider revenues as a percent of  capitalization a beter indicator for young companies.  But even then it’s hard to judge what is reasonable. Linkedin Corporation (NYSE:LNKD) cap to revenues is about 19x based on 2012 estimates; at a $100 billion cap, Facebook’s would be 15x – at least until the first quarter results for 2012 were published. I wonder now if it will command $100 billion valuation at the IPO given the slowdown in profits. The new numbers reported in its s-1 show just how tough it is to make money when Facebook is building pricey data centers and spending top dollar for engineers and other key professionals.

Who would benefit the most from reading this book? Investors? Potential investors? Facebook users?

In my totally unbiased opinion, everyone should buy and read this ebook. I had in mind two sets of readers: stock market newbies who are attracted to the story because they are on Facebook and feel that maybe they should think about investing for that reason. And  I was also thinking about more experienced investors. I hope my book give s a good overview and helps them to confirm or challenge their views. I always enjoy finding good research in one spot so I can think through different ideas. Seeing it all together sometimes changes the way I think about things. So in one relatively short ebook, readers will find a little history on high tech; an overview of the culture and business plan of Facebook; and how really smart financial types can say this a great business or not – and all based on the same set of data.

I would hope that readers see how the ‘experts’ take a set of numbers and then try to match them to the story and vision of an entrepreneur. In this case, the story is fascinating in its own right and it is  amazing how so many people disagree on what will come next. But everyone can agree that it will be great to watch how the Facebook story unfolds.

Did you meet with any top management while preparing the book?{I’ll skip this. I wrote it during the quiet period)

Finally: Do you own stock?!

I own stock, but not Facebook. Whether readers invest in Facebook or not doesn’t matter to me personally. I just hope they will be able to make an intelligent decision after reading the Primer. That’s why I put a giant linkfest at the end of the book – to encourage readers to continue their research.

And I would definitely like to know what they think Facebook is worth. I put a poll on my blog to hear what readers are thinking. Here’s a link to the poll. And don’t forget to leave comments. I want to know why you’re voting one way or another!


Nancy Miller is a freelance financial journalist who has contributed to a number of publications, most recently Barron’s and, time.com. Before taking time off to raise a family, she was chief corporate reporter at Knight-Ridder Financial News;  real estate and markets reporter at USA Today, and managing editor of Quick Nikkei News, the first American-run newsroom for a subsidiary of Nikkei and QUICK Corp. of Japan. Follow Ms. Miller @nancefinance on Twitter.