Friday, May 04, 2012

Is Facebook Really Worth $96 Billion in an IPO?


Facebook will be taking their IPO (Initial Public Offering) show on the road next week.  They’ll be visiting investment firms and banks to talk up the IPO and the figures developed by their “smartest guys in the room”.  Of course, these companies will be having their own smartest guys in the room listening to the pitch, looking at the numbers and trying to see if it makes sense.  Also, markets aren’t always rational.  Despite what the numbers say, when too many people are chasing too few shares and irrationality takes over, or when an IPO is priced  incorrectly, there could be a sizeable positive pop.

Moreover, blips in Q1 results are making some people nervous.  Q1 revenue was up 45% versus last year to $1.06 billion while net profit decreased 32% to $205 million.  Revenue growth in Q1 was up only slightly over Q4 2011. These are  not good things.  Other activities that have raised some concerns:

  • Facebook agreed to pay $1 billion for Instagram, a company that makes it easy to share photos
  • Facebook paid $550 million for patents filed by AOL and owned by Microsoft
  • Facebook in March was hit with a lawsuit in March filed by Yahoo that alleged that Facebook   infringed on 10 Yahoo patents.  There are now 16 on the list. 

The figures Facebook filed with the US Securities Exchange Commission is to have an initial stock price   of $28 to $35 per share.  This would equate to a valuation of $70 billion to $88 billion. 

Sam Hamadeh of PrivCo thinks the IPO price will be between $38 and $40 per share.  "Facebook will mostly be given the benefit of the doubt ... but they still have a lot to prove," Hamadeh said.  "Especially after big IPO investors have been badly burned buying into the IPOs of Zillow, Groupon, and Zynga, all of which are trading well below their IPO prices.  They don't want to get burned again."

GreenCrest Capital’s Max Wolf believes that the financial numbers suggest a value of $60 billion.  This is 37%   less than the $96 billion Facebook is thinking of. 

Should Facebook go public at $28 share, initial investors like hi  tech investment fund FirstHand Capital would suffer an immediate paper loss.  They had purchased shares at $31 to $32 dollars and can’t sell their shares for six months after the IPO. 

BIA Kelsey’s Jed Williams stated that revenue would have to grow 41% annually over the next five years to justify Facebook’s   numbers.  This would suggest revenue almost 460% larger at the end of year five.

Morningstar believes that Facebook’s revenue would have to increase from 2011’s $3.7 billion with profit margins of 27% to $40 billion over the next six to seven years to justify the $96 billion valuation at time of initial public offering. 

According to Bloomberg - “Facebook is betting its growth prospects will persuade investors to pay 99 times earnings for its initial public offering, a higher multiple than 99 percent of companies in the Standard & Poor’s 500 Index.”

At the low end of the IPO range, Anup Srivastava, an assistant professor of accounting information and management, Kellogg School of Management has a base case scenario of $25 billion.  “This is based on the firm’s revenues reaching approximately $21 billion in ten years’ time from approximately $4 billion today, and the firm maintaining a high return on assets of approximately 20 percent.”

Different smartest guys in the room.  Different assumptions and models.  Different numbers.  And people are still trying to figure out how to value advertising revenue on mobile devices. The roadshow begins Monday.  Less than two weeks and then the IPO fun begins. I

 

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