May 4, 2012
Facebook IPO Could Be Worth Record $96 Billion
Facebook, on the verge of going public, has set its share prices at $28 to $35, a share price that would set the social network´s valuation at close to $87 billion, although many market watchers believe that price will likely rise before the company does go public later this month, according to a regulatory filing released yesterday (May 3).
Facebook will begin meeting with investors next week and is scheduled to officially price the offering on May 17, according to Bloomberg Business Week.
If the initial public offering (IPO) goes as Facebook co-founder and CEO Mark Zuckerberg plans, it would be a record debut for an American company. The IPO, which is scheduled to commence May 18, would make Facebook the most valuable US technology company at the time of going public, exceeding Google´s $23 billion IPO in 2004.
At nearly $100 billion, it would also rival current market values of more established corporations, such as Amazon, McDonald´s, and computer maker HP.
Currently, the largest ever IPO valuation for a US company was $60.2 billion for United Parcel Service (UPS) in 1999, according to analytics firm Dealogic.
Facebook´s high-end valuation would make the social network more costly than every member of the S&P 500 relative to earnings except for Amazon.com, Leucadia National Corp. and Equity Residential, data show.
While Facebook has amassed more than 900 million members since debuting in 2004, Zuckerberg has tried to curb slowing sales growth amid increasing competition from Google and Twitter.
“It´s really, really expensive,” said Bob Rice, managing partner at Tangent Capital Partners LLC, on Bloomberg Television. “It´s very hard for me to get my arms around a valuation of 80, 90 billion dollars for a company that did a couple of hundred million dollars of profit in the quarter.”
Earnings for Facebook in the 12 months through March 31 were $972 million, with sales of more than $4 billion. Sales could rise to $6.1 billion this year, according to EMarketer Inc., giving the company its third straight year of slowing growth in revenue.
Facebook and its holders (Accel Partners and Digital Sky Technologies) plan to sell 337 million shares. At the high end of the range, the IPO would raise $11.8 billion, making it the largest initial share sale on record for an Internet company. Zuckerberg is offering 30.2 million of his 533.8 million shares. The majority of his net proceeds will be used to pay taxes associated with exercising a stock option.
If Facebook´s valuation reaches anything close to $100 billion, the company would have a market capitalization about half as high as Google´s, even though it has one-tenth the sales, data show.
“If you compare it to the number of employees, compare it to the earnings, the valuation is still several times greater than other flagship technology companies,” Ray Valdes, an analyst at Gartner Inc. in San Jose, California, told Business Week. “Still, there´s a tremendous amount of interest, and the valuation is lower than expected.”
Facebook´s IPO will be a defining moment for Silicon Valley, spawning a new generation of millionaires, and likely a few billionaires, including Zuckerberg, whose stake in the company is worth $18.7 billion.
But while the social network is rapidly booming, it is questionable whether its trajectory is slowing. Revenue in the last quarter rose 45 percent from the previous year, but fell 16 percent from the previous three months.
Facebook will need to convince skeptical marketers that ads on the site lead to people buying products. It has lagged in the fast-growing market, where Google has gained significant influence with its Android software. And Facebook has little presence in China, home to the world's largest population of Internet users.
Perhaps the bigger issue is Facebook´s core business, Morningstar analyst Rick Summer told Wall Street Journal reporters. “There´s still no good understanding for what advertisers are paying for.”
A lot is riding on investors who bought into Facebook at outside valuations, believing the company would continue its rapid growth. While Facebook said Thursday it is targeting an initial stock price of $28 to $35, some investors expected a higher value of $44.
If the social network giant goes public at the lower end of the price range, it would set a valuation of $77 billion, resulting in an immediate loss for investors like Kevin Landis of tech investment fund Firsthand Capital. Landis bought shares of Facebook on the secondary market for $31 to $32 per share over the past year and agreed not to sell them for six months after an IPO.
“I´ve been surprised before, but I´ll be surprised again if it ends up pricing at that low end of that range,” said Landis, adding that he isn´t worried yet, partly because the low range may be a tactic to build excitement for the IPO.
During the May 17 meeting with investors, Facebook will narrow down a specific price before trading begins on May 18, by which time investor interest could cause bankers to raise the price even higher.
With the pricing, it is believed that Facebook could raise as much as $13.6 billion. Zuckerberg will control about 57.3 percent of the voting power of Facebook´s outstanding stock following the IPO.
Turner Investment Partners´ fund manager Chris Baggini said he plans to buy stock in the IPO and thinks even if the company prices on the high end of its range, it would be a discount. He sees Facebook being valued at $200 billion in just four years.
Jed Williams, an analyst with BIA Kelsey, was more cautious. To sustain Facebook´s valuation, the company would need to grow revenue at 41 percent each year in the next five years, he noted.
Summer said the only way to justify even the low end of Facebook´s valuation would require the company to make $40 billion in revenue within the next seven years, while maintaining the same profit margins. Facebook's revenue in 2011 was $3.7 billion and profit margin was 27 percent.
In short, Facebook will need to expand into other areas like e-commerce or payments in order to support its valuation. It will be extremely interesting to see what happens when the world´s largest social network goes public in just a few weeks.
Morgan Stanley, J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. are the lead underwriters. Bank of America Merrill Lynch, Barclays PLC, Allen & Co., Citigroup Inc., Credit Suisse Group AG and Deutsche Bank Securities are the other bookrunners on the IPO, in addition to which 24 firms are co-managers.
Zuckerberg appeared in a video for investors on Thursday, discussing why he decided to start the social network.
“I grew up with the Internet, when I was in middle school I was using search engines like Google and Yahoo,” he said. “I thought it was the most amazing thing. Now you have access to all this information. The thing that was missing was just people.”