Burnie, DeMello comment on Facebook IPO

David A. Burnie, Ph.D., CTP, CFA
National City Corporation Endowed Chair in Finance and Commercial Law
Professor of Finance
Department of Finance and Commercial Law

The filing of Facebook’s S-1 with the SEC on February 1st has focused the attention of the many market participants on the value of the company.  The questions are meaningful to the market and investors given the magnitude of the possible valuations.  The company has experienced rapid growth in revenues and net income the past few years as reported in the S-1.  Revenues have grown about 120% (CAPG) from the 2007 and 2009 until 2011; net income about 134% over the since 2009 while EPS on a diluted basis has grown 114% since 2009.  The growth in shares outstanding has slowed EPS growth.

The S-1 lists up to $5 billion in new shares at a Par value of $.000006.  While it is unlikely that such a high number of shares will be offered, the impact of new shares will dilute the current performance numbers. The value of $75 to $100 billion for Facebook implies a multiple on 2011 revenues of 20 to 27 times respectively or 112 to 150 on 2011 net income respectively.  These are high multiples by the broad market average standard,  such as the S&P 500 in the range of 13 to 13.5.

Recent internet and technology firms had high multiples as well.  Zynga had a 77.26 multiple of net profit; LinkedIn based on the IPO pricing had a 17.5 multiple on revenue and a 276 multiple on net profit. The degree of market success for recent IPOs has been less than spectacular.  While LinkedIn IPOed at $45 and closed at the end of the day at $94.25 for an implied value of $8.9 billion it has oscillated considerably but as of the morning of 2/29/2012 is valued about $8.5 billion.  Zynga priced at $10 and closed lower.  In February the market price has risen into the $13 range causing the market value to rise from the initial offering value of $7 billion to about $9.4 billion. Still less fortunate is Groupon, priced at $20 is around $19.87 with a flat growth in market value.  The music/radio site Pandora went public at $16 a share and has traded below $16 for most of time since then and is now at $12.90.

A key issue to be concerned with is the monetization of the business and the path of long-term growth.   The experience of the 1990’s illustrates that monetization is critical.  The high valuations were based on traffic to sites, commonly referred to as number of eyeballs, but heavy looking did not mean cash flow.  Today’s companies are doing better because they are getting revenue from advertisements, product sales fees and so forth.  The high multiples are based on expected high growth rates in revenues and profits for a long time to come; while it is hard to estimate what is exactly implied in these possible valuations a degree of caution should be applied.

The choice to buy depends on growth and whether the key managers, such as Zuckerberg, can continue to push the number of users up from 845 million at past rates and also get them to spend more time on Facebook.  Zuckerberg with some 28% ownership and 50+% voting control will clearly be interested in maximizing the value of Facebook.  There is a lot to consider when making an investment in any company and perhaps more so in a business like Facebook.  So check out the S-1 filing on Facebook.

 

Jim Demello, Ph.D.
Professor of Finance
Department of Finance and Commercial Law

Facebook’s recent S-1 filing for an IPO has resulted in a lot of discussion regarding the potential attractiveness of the stock and the future of the company itself.  The word On the Street is that Facebook, with its 845 million users, is raising public funds so as to have the financial slack to combat competition from the likes of Google+, LinkedIn, and Twitter.  While the potential $5 billion dollar stock issue could end up being significantly over-subscribed, what is still rather uncertain for many interested observers is the future performance, competitive strength, and life-cycle of the company, given the track record of other social networking sites like MySpace.

What this stock offering has done, though, is given us an idea of Facebook’s revenue stream and potential value ($75 -100 b), which can be used to compare with the likes of Google. It has also shown just how much control will be wielded by Mark Zuckerberg (58% of the voting rights), the founder, and how much money the founding partners are likely to pocket from the deal.  Whether Facebook will become the next Google or will disappear into the cyber-black-hole like MySpace is still anybody’s guess. I guess it really depends on whether the current move towards a Timeline is viewed positively and as not much of a loss of privacy by the die-hard Facebook fans.  If it is, it won’t be long before the “socially networked” population latch on to the NBT (Next Big Thing).

Editor: Cindy Wagner
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