BIDaWIZ Blog

Should I Still Buy Facebook When It Goes Public?

The BIDaWIZ Team — Wed, 16 May 2012 20:00:41 +0000

Two and half months ago, we wrote about Facebook’s upcoming initial public offering. Since then, more information has been released about the company and its strategy going forward as evidenced in the $1B Instagram acquisition. Still, our investment thesis hasn’t changed.

The big trading day
Facebook shares are set to trade on the Nasdaq this Friday, May 18, 2012. A recent SEC filing revealed that 337.4 million shares will be offered to the public but an amendment to that filing has been issued, effectively increased that amount by 84 million for a total of 421 million shares. In addition, Facebook is targeting a price of $34 to $38 which equates to $14.3 to $16 billion in new capital and a total valuation near or above $100 billion. We would point out that the offering is oversubscribed which means the stock will likely trade closer to $38 per share. As a frame of reference, that total valuation exceeds McDonald’s and is inline with Amazon. In addition, the expected volume is likely to exceed 600 million shares traded on Friday alone which could test the Nasdaq auction system. The last bit of information on the big day relates to expected insider selling which is likely to be about 57% of the offering. Insiders such as Mark Zuckerberg will maintain a majority ownership in the company, but, it is somewhat surprising considering that insiders at other large tech companies sold little to no shares on the day of their IPO.

Facebook’s Financial Statements
The company now has 901 million active users and counting, up from 845 million a few months ago. In addition, we know that for the first quarter of 2012, the company generated $1.1 billion in revenue which resulted in $205 million in net income and $381 million in operating income. Annualized first quarter revenues equates to $4.4 billion vs. 3.7 billion but expenses appear to be rising. Both net income and operating income before taxes would be down if we annualized first quarter 2012 expenses as compared to 2011. In 2011, the company did $1 billion in net income and roughly $1.7 billion in operating income before taxes and other expenses. The company still has about $3.9B in cash on their balance sheet.

The Risks to Facebook’s Business Model
We all know the growth story with Facebook so let’s focus on the downside risks which were disclosed in the company’s S-1 filing.

High Growth. First and foremost, the company cited retaining and adding users as a risk factor which may seem like the obvious one. But, the company has already significantly penetrated key markets which suggest that growth will become more difficult in the future. They have greater than 80% market penetration among internet users in Chile, Turkey, and Venezuela. In the US and the UK, the market penetration is greater than 60%. Even more, the company faces significant barriers in penetrating high growth markets such as China due to government censorship. We can also see that growth rates have begun to slow as indicated in the S-1 filing. Specifically, quarterly user growth has gone from ~18-26% in 2009 to 5-10% in 2011. Slowing growth is also reflected in the company’s financial statements. Although top-line has gone from $777 million in 2009 to $3.7 billion in 2011 to a projected $4.4 billion in 2012, actual annual growth has decreased in each of the past three years or 186% to 154% to 88%. Operating margins fell to 47% in 2011 from 52% in the prior year as costs have grown. Frankly speaking, the downside risks to growth out weigh the upside.

Monetizing Mobile. We welcome the Instagram acquisition as it provides a way for Facebook to better monetize the mobile platform but that doesn’t solve the fact that the company doesn’t have a mobile device and operating system. The company also doesn’t currently have a robust mobile advertising platform which is concerning given the high rate of user adoption for mobile platforms. Since almost all of Facebook’s revenue is generated through advertising and gaming on its web platform, there is a serious risk to their top-line should mobile use become dominant without the company having a mobile platform to monetize it. Let’s also not forget that a major advertiser named GM just pulled their $10 million ad campaign with Facebook as it provided ineffective. The Instagram acquisition should help mitigate this risk but it doesn’t solve the problem and we don’t know the value of Instagram yet.

Competition. Competition in the internet space is always an important factor to consider when valuing a company. Mark Zuckerberg began this company in 2004 (ironically, the same year Google went public) and has grown it very quickly which is very impressive but it’s always a testament to how quickly innovation occurs in the internet world these days. Someone else could theoretically come into the market and create a network effect that could hurt Facebook’s growth and retention rates in the future. Let’s also not forget the established internet giants (i.e. Google, Microsoft & Twitter) that continue to attack Facebook from all sides. Having said that, historically the company has been able to defend and grow its user base through its network effect strategy and ability to quickly innovate with new product launches.

Valuation
The company’s valuation continues to be a moving target but it should be in the $93 billion to $104 billion range. This suggests the company will trade at 23 to 26 times last 12 months revenue and 96 to 107 times last 12 months net income yet only 53 to 60 times operating income. Facebook’s valuation may seem outrageous compared to the rest of the market but when Apple and Google went public, investors offered similar valuations and we all know how well both of those companies have done.

Bottom-line: Should I Invest?
Given the concerns that we’ve pointed out with our analysis of the the company’s risk factors, we would caution investors to wait at least 6 to 12 months until there’s better visibility on how the market values Facebook. There could be violent swings in the stock price after it goes public especially if over 600 million shares trade on day 1. Also, it is worth noting that insiders are selling a substantial amount of the capital raised. Sure, you could put aside some money that you’re willing to risk losing but definitely be wise on how much of your portfolio you allocate until there’s a better understanding of the valuation. Try not to invest with your emotions.

More Investment Questions? Browse Answers or Ask a Finance Professional.

Technorati Tags: Facebook, Investments, Portfolio, Stock Market, Stocks

Moving Past The Fear Of Investing Overseas

The BIDaWIZ Team — Fri, 11 May 2012 17:00:22 +0000

On a daily basis, we are reminded of how we live in a global economy in which news overseas can impact us in the United States and vice versa. By the same token, a sputtering or slow growth U.S. economy can also lead investors to search for opportunities overseas to at least diversify their exposure to risk. Still, many investors have yet to get over the fear of allocating a portion of their portfolio into foreign economies.

The largest growth coming from overseas
Last year, we published a piece analyzing the top 10 largest companies in the world and how it has changed over the past five years. There were two key takeaways.

First, the market believes the largest foreign companies will outperform the largest companies based in the United States. Secondly, the most valuable sectors are those focused on oil and technology as opposed to in the past, in which the wealth was spread across multiple sectors (financials, basic materials, technology, healthcare, industrials, and consumer goods). Of course, the largest companies in the world do not represent the entire market but they are on the top of the supply chain so it is a factor to consider. In addition, it is important to note that based on the historical trend and future forecasts, the greatest growth for the global economy going forward will not be in the United States. Today, the U.S. represents about a third of the global growth in real dollars. That amount is expected to decrease to about twenty percent in fifteen to twenty years.

Start small
You don’t need to allocate a significant portion of your assets overseas. In fact, we would not recommend investing the majority of your assets overseas to most investors. Rather, start small by investing in an exchange traded fund that tracks emerging markets. But, you don’t have to just dabble with equities. Fixed income and overseas currencies may also offer a compelling value proposition while also meeting your conservative investment profile. For instance, you could hold some foreign currency with countries that have fiscally sound balance sheets such as Canada and Sweden. Another conservative approach is to begin investing in countries that are based in the United States, but generate the majority of their revenue overseas. Prime examples of this would be Intel and Exxon Mobil.

More Questions? Browse Answers or get investment advice online.

Technorati Tags: Bonds, ETF, Foreign Companies, Investments, Portfolio, Retirement Planning, Stocks

The Wealthy Should Prepare For The Expiring Gift Tax Exemption

The BIDaWIZ Team — Fri, 11 May 2012 15:00:31 +0000

Wealthy individuals that are seeking to pass along their wealth to their children and grandchildren need to be mindful of a major tax break that is set to expire at the end of 2012. Most of us know that we can gift up to $13,000 per year ($26,000 per married couple) to anyone tax-free. But, there is something else called the lifetime gift tax exemption that allows individuals to gift much more tax-free.

How much can you gift tax-free?
The lifetime gift tax exemption allows individuals to gift up to $5.12 million and $10.24 million if married. The exemption was increased in 2011 from $1M in 2010, but is set to return to 2010 levels starting in 2013. This means that wealthy individuals have six and half months left to pass along their wealth to others. Sure, last minute legislation could extend the exemption into 2013 but that seems unlikely given the political pressures to tax the wealthy. Who wins the presidential election in November will be somewhat of a factor, with a Romney victory helping the wealthy and Obama victory supporting the expiration of the tax break. We strongly advise wealthy individuals to meet with their estate planners to discuss this opportunity before it is too late.

The lost tax savings could be significant. The 2013 estate tax rate is set to revert to 2001 levels in which wealth passed to beneficiaries that exceeds $1 million, will be taxed at 55%. For instance, if an individual’s estate is worth $5, it will owe $2.2 million in taxes excluding other factors such as trustee costs etc. If that same individual provided a gift of $5 million in 2012, the amount of taxed owed would be zero.

What about grandchildren?
The generation-skipping tax, repealed in 2010, was imposed on both gifts and transfers to or for the benefit of unrelated beneficiaries that are 37.5 years younger than the donor or for a grandchild. This tax is in addition to the gift tax which effectively taxes the monies twice and is set to return in 2013.

How much can I gift each year tax-free?
The annual exclusion is the amount an individual or married couple can gift per year without being subject to gift tax. Currently, it is $13,000 per individual and $26,000 per couple. The gifts that exceed the annual exclusion are only subject to gift tax when the donor is already above their lifetime gift tax exemption. For instance, suppose you gift $40,000 to an individual for the year which is $27,000 above the $13,000 annual exclusion. The $27,000 will be deducted from your $5.12 lifetime exemption but it is not taxable unless you already exhausted your exemption. Thus, you will have $4.84 remaining of your lifetime exemption and would only need to report it by filing a gift tax return form 709; but not pay taxes on the gift.

More Questions? Browse Answers or ask your gift tax questions online.

Technorati Tags: Estate, Form 706, Gift Tax

Does Amending Your Tax Return Increase Your Chances of An Audit?

The BIDaWIZ Team — Thu, 10 May 2012 18:00:42 +0000

Individual tax returns or extensions were due about three weeks ago. Yet, many filers likely discovered that they made a mistake by unintentionally under-reporting income or expenses. It could be that they just received a 1099 that was supposed to be sent to them in February. It happens as nearly 6 million filers amend returns each year. Still, the taxpayer needs to correct it, even if that means ultimately having to pay more tax and amending their federal and state tax returns. So, what are the chances of being audited now that you have to amend your tax return?

What if my return hasn’t been processed yet?
If you e-filed your return using a software program like Turbo Tax, and the return is still pending, you should wait to see what happens next. If it’s rejected for some reason, you can make the changes to your return as well as address the reasons for the rejection. In some cases you can resubmit the return electronically; in other cases you need to print it out and submit a paper copy.

What if my return was already processed?
If your return has been processed, you’ll need to file a 1040X, Amended U.S. Individual Income Tax Return, as well as a state tax return. For federal tax returns you must file the amended return within three years of the date you filed your original return, or within two years of the date you paid tax. If you owed additional tax you need to pay the tax as soon as possible to avoid penalties and interest. If you are due a refund, wait until you receive the tax refund before filing an amended return.

Do I really need to file an amended tax return?
It depends on the situation. If the mistake was a math error or you accidentally left out a schedule that doesn’t change the amount of taxes you owe, then do not file an amended tax return. The IRS may send you a letter to verify certain information and request supporting documentation but that is about it. But, if you need to change your filing status, income, deductions or credits that will impact your tax liability, then you should complete an amended tax return. Failure to do so can result in the IRS reviewing your entire tax return in detail and assessing some hefty penalties.

Does filing an amended tax return increase my chances of an audit?
Technically, the answer is no but the return will be hand processed and reviewed by more agents and compared to the original return. Remember, the average Joe and Jane Taxpayer earning less than $200,000 a year, only has about a 1 percent chance of being audited.

Don’t expect your amended return to be processed in record time
Most Forms 1040X will take at least two to three months to be processed from the time the IRS receives the form. State tax returns may take longer.

More Tax Questions? Browse answers or ask you amending tax return questions online

Technorati Tags: Amending Tax Return, Audits, Form 1040, Form 1040X, IRS, Tax Returns

When Should I Start Taking Social Security Benefits?

The BIDaWIZ Team — Thu, 10 May 2012 14:00:25 +0000

The jury is still out on what will happen to the social security program which is expected to become insufficient by 2033 or in roughly 20 years. This means that workers under the age of 42 aren’t expected to receive the full social benefits due to them. Rather, they will be lucky if they get 75% of their benefits. Still, it is important to know when is the right time to start taking social security benefits.

When can you start collecting social security benefits?
Technically, you can begin collecting social security benefits when you reach the age of 62. But, you can also wait until you are 70 years old too. Of course, the amount of monthly benefits you receive will differ depending on which age you begin collecting.

For instance, if you choose to begin collecting social security before your full retirement age, your monthly payment will be reduced by the number of months you elected benefits prior to retirement. Full retirement age is 65 years old if you were born in 1942 or earlier, 66 years old if you were born between 1943 and 1959, and 67 years old if you were born in 1960 or later. If your full retirement age is 67 years old and you began collecting your social security at the age of 62, your benefits would be reduced by 30%. It would be 25% if you began collecting at 63, 20% at 64, 13.3% at 65, and 6.7% at 66. At 67, you would receive the full amount of benefits.

Let’s put this into real numbers with an example. Let’s say your current income is $100,000 and you were born on February 15, 1961, which means your full retirement age is 67 or in 2028. If you waited until your full retirement age of 67, your monthly social security benefits would be $2,341. At 66, it would be $2,171. At 65, it would be $2,005. At 64, it would be $1,840. At 63, it would be $1,712. At 62, it would be $1,588. Needless to say, you will likely receive the most benefits if you hold off on collecting social security until you reach the age of 70 which the payout would be $2,930 per month.

Is there a place to check what my social security benefits are online?
Yes, the Social Security Administration recently launched a portal called My Social Security – http://www.ssa.gov/mystatement/ which allows workers to view their benefits and earnings history online. The features of the portal include estimates of retirement and disability benefits for both you and your beneficiaries, details of your earnings history including social security and medicare taxes paid, and the ability to apply for benefits online.

More questions? Browse answers or ask your social security retirement questions online.

Technorati Tags: Investments, Retirement Planning, Social Security Numbers, Social Security Tax

At 50, You Can Stash More Money Into Your Retirement Account

The BIDaWIZ Team — Wed, 09 May 2012 13:30:18 +0000

Most of us are familiar with the benefits from contributing to a individual retirement account (IRA) or 401(K) plan early in life. In a nutshell, it prepares you financially for when you retire. Fortunately, lawmakers realize that not everyone is able to stash as much into their retirement accounts as they would like to early in life. Those turning age 50 and beyond, may be able to benefit from contributing more to their retirement accounts than when they were younger.

How much more can you contribute?
In the calendar year that you turn 50, you can begin to make catch-up contributions to your 401(K) or IRA. Specifically, for a 401(K) you can contribute an additional $5,500 to the $17,000 limit or $22,500 total in 2012. For an IRA, you can contribute up to an additional $1,000 to the $5,000 limit or a total of $6,000 for 2012. Catch-up contributions to an IRA are due by the due date of your tax return (not including extensions).

Unfortunately, the same income phase out rules apply when you turn 50. For instance, you can generally contribution to a Roth IRA, if your income is less than $179,000 for married filing jointly ($122,000 if single; $10,000 if married filing separately).

How big is the tax benefit?
If you contribute the maximum amount, it can incrementally add to your retirement savings, especially for 401(K) plan holders. For instance, by contributing $22,500 over a ten year period and assuming a 5% rate of return, a 401(K) account will grow by $284,000, of which almost $60,000 is profit. This compares to a $221,471 balance and $46,000 of profit if you only contribute $17,500 per year. The extra contributions can really help you catch up on your retirement savings, even in only 10 years.

If you invest $6,000 in your IRA for 10 years, the account could grow by $75,933 and almost $16,000 would be profit. This compares to a $63,277 balance and $13,000 of profit, if you contributed only $5,000 per year. Please note that the funds in a traditional IRA are tax-deferred until you withdraw it. A Roth IRA can be withdrawn tax-free after age 59½.

Reallocating Funds
Part of the reason that the tax code provides this catch-up rule is for parents to reallocate their retirement portfolios. Specifically, parents that saved money for their children’s college may now have extra money to contribute to their 401(K) and IRA plans. Please note that funds within a Roth IRA can be used for educational expenses.

More Questions? Browse Answers or ask your 401(K) tax questions online.

Technorati Tags: 401K, Retirement Planning, Roth IRA, Traditional IRA

Lending Money To Family And Cutting Out the Bank

The BIDaWIZ Team — Fri, 04 May 2012 20:00:41 +0000

Banks are still only offering clients a whopping 0.50% per year and only 0.91% for the most generous savings accounts. Clients in search of a home equity loan may be hard pressed to find an interest rate below 6%. Many families are noting this spread and taking the middleman (i.e. bank) out of the equation. The financial benefit with this approach does however come with certain risks.

Don’t forget about due diligence
Even though the borrower is family, you should still go through the process of investigating the credit worthiness of the borrower. Behavior alone is not a determining factor in their ability to pay you back and neither is their word. Take a step further and request that the borrower provide you with a credit report so you can learn what their debt levels are at and if there have been any instances in which they missed payments.

How should this be reported?
Regardless of the type of loan, the terms of the agreement should be detailed in a signed contract. Even though you are family, it should be treated as a business transaction to ensure that the borrower pays the lender according to the terms. Specifically, the contract should detail the principal amount, interest rate, repayment schedule, names and addresses of both parties, as well as any other relevant information.

For tax purposes, the interest income the lender receives should be reported on line 8a of Form 1040 and summarized on Schedule B if they have over $1,500 in interest.

Lending money to family doesn’t come without risks
Lending money to family can be a catch 22 because you should care for family in their time of need but also want to be paid back. The borrower can take advantage of this situation and skip payments even if the terms are explicitly stated in a legal contract. It can certainly get awkward during family gatherings which will make it difficult for the lender to request payment.

The gift that keeps on giving
Once you’ve lent some money to a family member, you may become a crutch for them. It depends on what the money will be used for but most investments require follow-on funding which can become costly. If it is just a home equity loan and the terms are explicitly stated, then that is a different story.

What happens if the lender needs the money back?
Yikes! If you recently were laid off and underestimated the amount of money you would need in your emergency fund, you may have to ask for the money back. It is best only to lend money to a family member if the loan represents a small percentage of your liquid assets or less than 5%.

More Finance Questions? Ask a finance professional online.

Technorati Tags: Borrower, Family, Home Equity, Interest Rates, Lender

What Small Businesses Need To Do Before Partnering With A Goliath

The BIDaWIZ Team — Fri, 04 May 2012 14:30:17 +0000

Many entrepreneurs try to partner with a large company to distribute their product or service to the masses. But, this can often lead to two very different outcomes. Learn how to find the right partner for your business.

Understand how the two companies differ
Many entrepreneurs are so entrenched with their own company history and brand that they overlook the structure and dynamics of the company they would like to collaborate with in a deal. Entrepreneurs need to understand that many large companies have specific guidelines to follow when evaluating a potential partnership. It’s very important to understand that a partner could alter the trajectory of an entrepreneur’s vision if the scope and objectives aren’t discussed in detail prior to signing an agreement. Even then, a large partner can still alter your course.

Ask yourself why you want to partner with them?
Specifically, what are the advantages for your company as well as for the other company? How is it mutually beneficially to both companies? In answering these questions, you’ll have a better idea if it is the right fit for your business. In addition, by going through this exercise, it will help you to formulate a compelling case for the other company to work with you in the future. The value proposition could be that your company offers a certain technology that they don’t currently provide their customers. In addition, you need to articulate how it is easier and more cost efficient for them to partner with your company versus building it internally or working with another provider. It is highly probably that they will also ask who your competitors are and what your company offers that the others do not. Responding that you don’t really have any competitors usually doesn’t go over too well.

Be prepared to wait
Most partnerships will take longer than you think as many large companies move slowly. There will likely be an introductory call, then a demonstration or meeting, then followup calls, and finally meetings with the higher ups. Even after the terms of the partnership become clear, you’ll still need to go through legal to finalize all of the terms in writing. Then, there is also the instance in which you may need to alter your product or service to meet the requirements of the larger partner. You’ll be lucky if it is completed within 90 days. Six months to a year is a more likely scenario.

Don’t let the potential positive publicity overshadow the business decision
Being able to partner with a Goliath is newsworthy but that doesn’t necessarily mean it is always the right strategy for your business over the long-term. If the two companies do not have the same vision and objectives in working together, the partnership could end up being a complete failure and a big money and time waster.

More questions? Browse answers or ask small business partnership questions online.

Technorati Tags: Business Idea, Business Planning, Entrepreneurs, Small Business Marketing

When Should I File For Bankruptcy?

The BIDaWIZ Team — Thu, 03 May 2012 22:00:38 +0000

While personal bankruptcy rates are on the decline from a high of almost 1.6 million in 2010, there were still nearly 1.47 million individuals that filed for bankruptcy in 2011 (source: uscourts.gov). If you believe you’re on the brink of financial collapse, it is important to know when is the right time to file for bankruptcy.

Timing is critical
It is important to know when you should file for personal bankruptcy. Many individuals file too early and don’t exhaust all of their options. Others, wait until the very last minute which can cause even more financial problems.

Bankruptcy should be a borrower’s last option
You may think that you don’t have enough money to meet creditor demands, but a significant adjustment to your budget or downsizing to a small house or apartment could free up cash to settle outstanding debts. It’s also worthwhile to seek credit counseling and potentially work with a debt settlement company. But, make sure you choose a debt settlement company wisely, as there are many in the marketplace that charge large upfront fees and don’t actually help the debtor.

If your problem is credit card debt, then first speak with the lender about lowering your interest rate or propose a payment plan. The same goes for mortgages as there are many homeowner relief programs available with little to no tax consequences.

The point here, is that you should only file for personal bankruptcy if you absolutely have to because the financial consequences can be long lasting. Specifically, a bankruptcy filing can stay on your credit report for up to 10 years. But, that also doesn’t mean you will never be able to obtain credit again, as creditors and the government are more forgiving now then during past decades.

When is it too late to file for personal bankruptcy?
Technically, it is never too late to file for bankruptcy. But, if a creditor sues you for outstanding debts and a judgement is entered against you, a lien may attach to any real estate that you own and the previously unsecured creditor essentially becomes secured with a right to your property. If you filed for bankruptcy protection earlier, the automatic stay would have prohibited the creditor from taking any action against you without going through the bankruptcy court first.

More Questions? Ask your bankruptcy questions online.

Technorati Tags: Bankruptcy, Chapter 13, Chapter 7, Credit Card Debt, MORTGAGES

You Will Soon Find Out How Expensive Your 401(K) Plan Is

The BIDaWIZ Team — Thu, 03 May 2012 15:00:20 +0000

The new 401(k) disclosure rules will soon provide employees with information about the fees and expenses connected to their 401(k) plans. The fees administrators charge plan participants has always been nearly impossible to identify and many employees mistakenly think their 401(k) is free.

How will the law change 401(k) fee disclosure practices?
The law will guarantee that employees receive information about the fees and expenses associated with their investment choices. This information must be provided to the plan sponsors (i.e. employers) by July 1st, 2012 which effectively means that employees will find out no later than August 30, 2012. Specifically, the administrators must disclose the investment management fees, legal fees, and accounting fees. In addition, individual expenses will also be disclosed such as the costs related to taking out a loan against your 401(k) plan which is not uncommon these days.

The new rule also requires that participants receive statements at least quarterly showing the cost of the fees and expenses, as well as a description of what the charges cover. Information about historical investment performance also must be provided, and the information must include a chart to make it easier to compare available investment options.

What changes can I expect to my 401(k) plan?
Many employers are already preparing for the expected backlash from employees following the fee disclosures. As an employee, you should expect that your employer will offer a plan with a low administrative fee. Many employers will likely be able to negotiate lower investment management and administrative fees because of the new disclosure rules.

This new legislation is a positive for employees as they will be able to differentiate between a good and a bad 401(k). Fees will become a significant component in evaluating various plans and administrators will now be held accountable.

Is there a way I can determine what my plan costs me now?
A study completed for the Investment Company Institute found that median fees were 0.72 percent of assets, or about $350 per participant who had an average account balance of $48,522. But, over a 30 to 40 year career, this amount can add up and equate to tens of thousands of dollars paid in administrative fees. Thus, negotiating the fees down by even 10 to 20 basis points can make a big difference.

If you want to learn about plan fees before the new rule takes effect, AARP has a calculator that helps you determine and compare fees associated with particular plans, and calculates the fees’ potential impact on your 401(k) balance when you reach retirement age.

More 401k Related Questions? Ask a Tax Professional Below.

Technorati Tags: 401K, Employee, Employer, Solo 401(K), Traditional 401(K)