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By Jason Stipp | 02-02-2012 01:00 PM

Five Things We 'Like' and a Few Others We Don't

Morningstar markets editor Jeremy Glaser sees lots of pluses (and some minuses) in Facebook's IPO filing, recent economic data, market performance, and earnings news.

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to the Friday Five.

In honor of Facebook's impending IPO, we're going to talk about several things we like this week, and maybe a few things that we don't. Here with me, as always,with the Friday Five, is Morningstar Market's Editor, Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: Jason, I always like to be here.

Stipp: So what do you have for the Friday Five this week?

Glaser: Well, we're going to talk about Facebook, about same-store sales, about a blistering January, MasterCard, and finally manufacturing.

Stipp: So, we had a chance to take a look at Facebook's S-1 this week. What did you see in there? What do we like about it, and what are some things that maybe we don't like?

Glaser: I think there certainly were things to like in the Facebook filing. It's a company that has been growing incredibly quickly, which shouldn't come as a surprise to anyone, but it's also throwing off a lot of free cash flow. Sometimes, these very high-growth businesses, the investment rate is so high that actually earnings are just nonexistent and there's no cash being generated, but that's not the case with Facebook. They don't have that many employees. They haven't been investing in crazy side ventures; they've really been focused on their core business and really kind of building an economic moat around that, creating that huge network effect so that people can't live without Facebook. So, I think that certainly was heartening to see.

But on the other hand, there are certainly things that we didn't like about it. I think the valuation is probably going to come out at some crazy level--you hear these $100 billion valuation levels being talked about right now. We just think that's going to be much too high, even based on the growing cash flow that's coming out of the business. Corporate governance looks like it's going to be a concern. Mark Zuckerberg himself will only have 28% of economic interest, but he's going to have 57% of voting interest due to some dual share class structures. So, I think that that's going to make it difficult from a common shareholder perspective to really get on-board from a governance standpoint.

Also that so much of their business is totally dependent on display advertising. I can think of another former fast-growing site like Yahoo that has a great display business, but has been having trouble building on that growth, and I think that Facebook will have to diversify the revenue stream and find new ways to monetize the user base in order to really be worth that $100 billion valuation.

Stipp: So certainly sounds like a bit of a mixed bag there on the Facebook IPO front. We also got some retail sales data. Maybe a little bit of news on the consumer front. Was there anything to like there?

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