TMT

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-       The Facebook IPO has priced at $38, at the high end of its revised range, representing a market cap of $108.6B, assuming exercise of vested options.

-       The price is about 26 times trailing revenues and 104 times earnings, which discounts 66.2% compound annual growth over the next 10 years.  In comparison, Google grew at a 42.4% CAGR in the 8 years after it hit the $4B revenue milestone.

-       As consumer Internet use shifts decisively toward mobile platforms, Facebook’s ability to monetize their position is constrained by the control that Apple and Google have over 3^rd party Apps.

-       GM’s repudiation of its Facebook ads is also troubling, calling into question the efficacy of ads, even on the browser platform.

At $38, the outstanding shares of Facebook will yield a market cap of just over $81B, but adding in employee options vested but not exercised adds another $26B to the total, bringing the practical value of the company to a whopping $108.6B.  Revenues over the past four quarters were $4.1B, up roughly 90% YoY, making the sales multiple a healthy 26 times trailing.  This valuation implies a 10 year growth rate of 66.2% at constant margins.  To put this in context, Google passed a $4B annual run rate in mid 2004, and has grown at a 42.4% CAGR in the 8 years since.  Without doubt, the expectations for Facebook are robust, if not realistic.

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-          Bulls see Apple transforming television and broadening its product line.  Bears fear iPhone subsidy cuts, the absence of Steve Jobs and the law of large numbers

-          The iTelevision faces more obstacles than bulls perceive, and an entry into mass market smartphones is out of character.

-          At the same time, subsidy cuts are not likely, Jobs’ vision should last a long time, and Apple has plenty of runway to sustain growth and profitability.

Apple is a celebrity.  Like a Hollywood A-Lister, Apple has an army of reporters, bloggers and industry pundits watching its every move, badgering its friends and neighbors for dirt, and even sifting through its trash.  For its own account, Apple feeds the hungry masses a thin gruel of guidance, while taking extraordinary steps to protect its secrets.  This absence of real information has inevitably boosted the cottage industry of Apple speculation: Will they or won’t they offer a television?  Will they or won’t they bring out a 7” tablet?  Will they or won’t they offer an entry level iPhone?   Can carriers force lower subsidies on the iPhone?  Does the loss of Steve Jobs mean the end of innovation at Apple?  How long can this hypergrowth go on, can they maintain these margins, and will Apple go on to be the first trillion dollar company?

Like everyone else, I have opinions.  These are based on my firm belief that the entire TMT sector is in the midst of a massive set of paradigm shifts, catalyzed, in part, by Apple’s own portable device innovations.  These shifts are putting enormous economic value into play for internet-based businesses and changing the nature of competition to capture that value.  These changes are mostly good for Apple, but raise some interesting strategic questions that make for a fairly wide range of possible long term scenarios.

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-          Verizon is willing to sell extra 700MHz licenses that it holds in major metro markets, contingent on approval of its deal for spectrum held by cable MSOs in a higher band but covering most of the US.

-          Verizon must be convinced that the FCC or DoJ will block its deal, and the cross selling arrangement it signed along with it, if it doesn’t address spectrum concentration.

-          The AWS spectrum may better facilitate transitioning Verizon customers from crowded 3G networks to more efficient LTE, and will offer a wider geographic area for mobility.

-          Verizon’s A and B block licenses are too fragmented to support a new mobile competitor, but could augment a smaller network or be the basis for a residential broadband play.

The handwriting is on the wall.  Since the rejection of the AT&T/T-Mobile deal, verbiage from the FCC has been strongly pro-competition and anti-incumbent.  With a decision on Verizon’s planned purchase of 20MHz of AWS spectrum from a consortium of cable operators due long before a potential Republican reconfiguration of the FCC and DoJ, Big Red decided to bolster its case before the government could squelch it.  This morning, Verizon announced that it would sell off its A and B block licenses that it had purchased in the 2008 700MHz auction, contingent upon closing the cable deal.

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-          Google’s unusual stock split locks in voting control for founders Larry Page and Sergey Brin, and long-time CEO Eric Schmidt.

-          The move is largely symbolic, as the trajectory of share issuance means that it would take decades to erode insider ownership to less than 50%.

-          Even then, very few companies of Google’s size have ever faced shareholder proxy battles or hostile takeover attempts, likely rendering objections to insider control moot.

-          Real investor “friendliness” is strong growth and excellent cash flows.  Google management has delivered and is positioned for more.

Never a dull quarter in Internet land.  The latest kerfuffle has analysts and investors in a snit over Google’s plan to lock in its current voting structure via an unusual stock split, through which each current shareholder gets one share that votes and one that doesn’t, and after which, all future share grants and acquisitions will made in non-voting stock.  Looking at the issue pragmatically, Google founders Larry Page and Sergey Brin, along with former CEO Eric Schmidt, currently control 66% of voting stock.  For the insiders to lose majority, the company would have to issue stock equal to 32% of its current capitalization, or more than $60B.  Given that the company has rarely included equity in its M&A, and that its employee option and restricted share grants have run just over 1% of outstanding shares per year, any chance to start a proxy battle would be decades away.

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The TMT industry is in the midst of massive paradigm shift that will destroy old paradigms and set the landscape for the next 25 years.  I have written about this incessantly – most recently, here, here and here.  While we like to focus on the birth of the next Phoenix, it is also instructive to consider the death of the older bird.

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-          Apple’s announced dividend and buyback plan barely slows the growth of its cash hoard

-          Apple has never done a big acquisition and it is probably foolhardy for them to start now – they are easy to get wrong if you don’t have experience doing them

-          Opportunities to invest back in the business abound – CDN data centers, wholesale wireless, video content – but Apple has been cautious, even if Google and Amazon have not.

-          If Tim Cook can’t think of a bold way to invest back in his business, calls to give more cash back to shareholders will rise again and soon.

Previous Research: The Future of the Internet: The Four Horsemen of the Consumer Cloud, or is it Five?

In his first real departure from the legacy of Steve Jobs, Apple CEO Tim Cook announced a $10B annual dividend along with a buy-back of up to $10B in stock over three years.  It’s hard to imagine Jeff Bezos or Larry Page making a survey of the institutional investment community for suggestions on the use of cash, as it is reputed that Apple did.  Not only are the results of such a survey obvious – “Pay us dividends and/or buy back your shares, please!” – but the likelihood that either Apple rival would care enough about their short term share price to follow the advice is small indeed.  Cook’s concession to return part of Apple’s $97B in cash, equivalents, and marketable securities is a sign that he intends to be at least marginally more investor friendly than his peers, and the market is cheering.

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