**Update: Facebook plans to file to go public tomorrow morning. Find out if investing in this online company is a good idea:
Original publish date: December 7, 2011
Wall Street will likely soon be partying like it’s 1999 as social media giant Facebook is reportedly planning an initial public offering (IPO) in 2012, according to The Wall Street Journal. The hotly anticipated IPO could raise as much as $10 billion in an offering that would value Facebook at $100 billion.
Facebook’s IPO: The Largest Internet Company IPO EVER
Most companies explore going public when they generate about $100 million in annual revenue. Facebook is on track to amass over $4 billion in revenue in 2011. Given this fact and the company’s expected valuation, the size of Facebook’s IPO is not surprising.
Some facts about Facebook’s anticipated $10 billion IPO:
- Largest internet or technology IPO globally EVER
- 4th largest IPO by a U.S. company
- 13th largest IPO globally
As a point of comparison, a $10 billion Facebook IPO would be over seven times as large as Google’s $1.4 billion IPO in 2004. If the Google IPO frenzy is any indication, Facebook’s IPO should generate near-hysteria among Wall Street and some investors.
Facebook’s IPO date is expected to be in the April-June 2012 time frame, though there is some buzz that it could occur earlier. The price (or price range) of stock shares is set when a company registers its IPO, so the price is not yet established.
Facebook Joins Internet Company IPO Boom #2
With its anticipated IPO, Facebook joins the latest round of internet companies going public. While this latest round isn’t as large–or manic–as the dot-com tech bubble of the late 1990s, it certainly constitutes a mini-boom.
Sizeable internet company IPOs in 2011 include:
Pandora Media (P)
Pandora, based in Oakland, CA, operates as an internet radio company. Pandora’s IPO on June 14 raised $239.4 million in an offering that valued the company at $2.6 billion. Pandora sold 14.7 million shares for $16 each.
LinkedIn (LNKD)
LinkedIn, based in Mountain View, CA, operates an online professional network. LinkedIn’s IPO on May 19 involved 7.84 million shares of stock sold at $45 a share, giving the company an initial market value of about $4.3 billion. The stock soared on its first day of trading, closing at $94.25, making the company worth $8.9 billion.
Groupon (GRPN)
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Facebook’s Rise to #1 Social Media Site
Facebook’s rise has been meteoric, with the company starting in 2004 in CEO Mark Zuckerberg’s Harvard University dorm room and growing to the dominant social media site it is today. It currently has 800 million total users, 700 million monthly users and 500 million daily users.
As this list shows, FB is solidly #1:
Most Popular Social Media Sites* (by est. unique monthly visitors)
- Facebook: 700 million
- Twitter: 200 million
- LinkedIn: 100 million
- MySpace: 80.5 million
- Ning: 60 million
- Google Plus+: 32 million
* This ranking uses average of global traffic rank + U.S. traffic rank, and was last updated Dec. 1.
Facebook’s Financials
Facebook isn’t required to make its financial results public (It will be required to do so by April, because it will cross the 500-shareholder limit by the end of this year). However, there are good estimates available.
Revenue
Facebook will generate revenue of $4.27 billion this year, according to Bloomberg, citing data from research firm eMarketer. Approximately $3.8 billion, or 89% of total revenue, will come from advertising. The other 11% comes from other sources, most notably gaming developed by its partner, Zynga, the creator of Farmville. Ad revenue growth is up 104% from $1.86 billion in 2010.
For 2011, Facebook will have about a 16.3% share of U.S. internet display ad revenue, and that number is expected to grow to 19.5% in 2012.
Profit
FB generated about $1.6 billion in revenue in the first half of 2011, while its operating income and net profit margin were reportedly $800 million and $500 million, respectively. Thus, operating and net income percentages were about 50 and 31, respectively.
These are SOLID profitability numbers. How do these numbers stack up against some heavyweights like Apple and Google?
A company’s profitability is best compared to others within the same industry, but Facebook has no direct peers that are public companies (Twitter is a private company) other than LinkedIn (to some degree), and LinkedIn has only recently gone public. With this caveat in mind, here is the comparison:
So Facebook Stock Looks Like a Great Investment, Right?
Hold on! While Facebook’s operating and profit margins above look good compared to Apple’s and Google’s, it’s important to keep two major factors in mind:
Valuations. Apple’s stock is trading at a P/E (price-to-earnings) ratio of 14 and Google’s at a P/E of 21. These stocks are reasonably priced given their growth rates (54% and 26% quarterly earnings growth, respectively).
The price for a share of FB stock won’t be determined until the company registers its IPO. That said, you can be sure the stock will be pricey on a P/E basis–IPOs usually are, especially hotly anticipated IPOs.
Business Plan. Additionally, both Apple and Google have business plans that have high “barriers to entry.” This means that other companies can’t easily set up shop and compete with either company. The same does not hold with Facebook.
Sure, it is THE dominant social media site by far, but look how quickly it grew from zilch to its current status. Also, keep in mind how quickly MySpace went from #1 to much lower in the heap.
Social media companies, as they derive most to all of their revenue from advertising, have low barriers to entry. The next Mark Zuckerberg could be coming up with the next Facebook in a college dorm somewhere as I type. Additionally, social media is akin to fashion and retail clothing–very subject to consumers’ fickle whims.
Facebook IPO: The Bottom-Line
Buying stock on the day of an IPO is usually NOT a good idea unless you are well connected and among the lucky few who get offered a chance (by the investment banks underwriting the IPO) to buy at the IPO price.
I believe a common misconception is that anyone can buy at the set IPO price. This is far from true. This is why articles touting how much a stock is up or down since an IPO are largely meaningless.
For example, LinkedIn shares were priced at $45, but they opened at $83. An investor interested in buying shares at the market opening on IPO day bought them at about $83.
In fact, he/she would have been lucky to pick them up at $83, as they soared to a high of $122.7 before closing at $94.25. At the current price of $67.89 per share, investors in LinkedIn have lost money unless they were among the select few who got shares at the IPO price.
Likewise, Pandora’s IPO was priced at $16, but the stock opened at $20 on IPO day. Thus, the true loss to most investors is greater than that stated in my chart above.
It’s likely best to wait until AFTER IPO day to decide whether you want to buy Facebook stock. You’ll be able to determine the valuation of the stock at the end of the first trading day. You’ll also be able to see if FB uses some of the boatload of cash its IPO will generate to make acquisitions to grow its non-advertising revenue. In my opinion, it needs to do just that.
