The Real Winner of Facebook’s $5 Billion Payday
Now that Facebook has filed for the largest internet IPO in history, all anyone can talk about is what valuation the social networking giant deserves.
With the IPO months away, I’ll take a different tact for today… and that is, “What do suppliers and Facebook partners stand to gain the most from the behemoth’s extra $5 billion in cash?”
After all, IPOs are ostensibly a way to raise money to invest in growth. So where exactly is Facebook’s future growth and who will get paid to make that growth happen?
According to the S-1 filing, Facebook doesn’t have specific investments planned:
“We intend to use the net proceeds to us from our initial public offering for working capital and other general corporate purposes; however we do not have any specific uses of the net proceeds planned… We may use a portion of the proceeds to us for acquisitions of complementary businesses, technologies, or other assets.”
Of course, there’s an entire economy of companies trying to make money off of Facebook’s boom.
But they aren’t trying to earn checks from Facebook itself. Rather, they’re trying to extract money from its users. And Facebook – let’s be clear – isn’t going to spend a dime of its cash to attract users.
Facebook already has users. Lots of users. What it needs is innovative ways to handle users efficiently.
Such a reality leads us to the one place where Facebook will no doubt be investing: efficient data handling.
Storing conversations… puppy pictures… “likes”… interests… and the private details of all those friends amounts to a massive data load.
Facebook data consumes at least 60,000 servers and over 50 million operations per second. The company presently spends about $30 million per year leasing data operations from Digital Realty Trust (NYSE: DLR).
But after years of leasing facilities, Facebook started running the network from its own $210 million datacenter in Prineville, Oregon in April 2011.
Months later, it started building a second datacenter at the same facility. And according to the IPO filing, “We are investing in additional Facebook-owned datacenters in the United States and Europe.”
At $200 million-a-pop, that’s at least $1 billion in spending.
The Prineville facility built by Fusion-io is a wonder of engineering. But its most astounding advances come from power management.
Even though it uses more electricity than 10,000 households, Prineville is the most efficient datacenter to date.
The average datacenter runs at a 1.7 power usage effective rate. But Facebook’s facility runs near 1.05 – close to the perfect ratio of 1-to-1. Such metrics allow Facebook to save 38% on energy costs, which amounts to millions added to the bottom line.
So who’s the genius behind this incredible efficiency? California-based Power-One (Nasdaq: PWER).
Power-One earns 31% of its revenue from power sources like the one it makes for Facebook. The rest comes from its Renewable Energy Division, which manufactures power inverters for solar energy. As a result, the stock trades mostly in lockstep with the solar market – making it mouthwateringly cheap.
For a few years now, I’ve seen shares of power-inverter manufacturers for solar unfairly dumped by investors – the result of falling solar cell prices. If anything, cheap solar cells should increase the installation of inverters, which haven’t dropped in price.
When you consider that the solar-inverter market is estimated to grow from $5 billion to $7.5 billion over the next three years, the turnaround story almost writes itself.
Over the last two years, Power-One has increased sales by 145% and grown its patent portfolio to over 116 patents. It also started a lucrative licensing program to supplement manufacturing.
The company’s return on equity is 49%. And 20% of shares are held by insiders.
Despite such strong fundamentals, however, the stock is ripe for the picking at only 4.4 times trailing earnings and 1.28 times book value. What a value play!
While Facebook partner, Zynga (Nasdaq: ZNGA), jumped 22% on the day of the IPO filing, Power-One has yet to see a price surge from its Facebook connection.
Bottom line: The high-profile custom power supply, along with Facebook’s plan to continue expanding datacenters, suggests that Power-One’s shares will trade well north of its current $4.50 per share price.
Ahead of the tape,