All you want to know about Facebook IPO

May 15, 2012   ·   0 Comments

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Is it worth to invest in over hype IPO or does Facebook deserve all the hype it has created? If you’re not already talking about the Facebook IPO, you soon will be. The social networking behemoth is set to go public in one of the largest initial public offerings in history on Friday.

The company has set an IPO price of $28 to $35 a share, valuing the company by as much as $96 billion. That would rank it as the largest Internet IPO and one of the largest IPOs in history, according to Renaissance Capital. Still, the price is a tick lower than the initial $100 billion valuation many had expected from Facebook.

Update on Facebook Stock Price Update:

The company founded in a Harvard dorm room by Mark Zuckerberg, who turned 28 on Monday, raised the price target to $34 to $38 a share in response to strong demand, from $28 to $35, the source said.

That would value Facebook at roughly $93 billion to $104 billion, rivaling the market capitalization of Internet powerhouses like Amazon.com Inc and exceeding that of Hewlett-Packard Co and Dell Inc combined.

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Pricing an IPO is always a tricky proposition. The company wants to set its offering price as high as possible, because that generates the most cash for the business itself.

Facebook is set to raise $13.6 billion from its IPO, which is a healthy war chest for all manner of things — buying another Instagram, fending off patent litigation, or building timeline 2.0 (and the next 100 versions).

What’s with all the hype?

Facebook’s IPO has long been one of the hot stories in both the technology and business worlds. The company follows a long string of recent tech IPOs, including Groupon, LinkedIn, and Zynga, which have seen mixed results. Facebook’s IPO will be the granddaddy of all those.

The numbers are staggering. The company boasts 526 million users who check into Facebook daily (and 901 million who log on once a month), 3.2 billion “likes” and comments a day, 300 million photos uploaded per day, and 125 billion “friend”ships.

One study released last week noted that it was Facebook, and not Google or Apple, that was killing the messaging business for the traditional wireless carriers, as users increasingly rely on Facebook for their communications needs.

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At $35 a share, Facebook would be valued at 70 times its projected 2012 earnings of 50 cents a share, and 18 times its estimated revenue of $5 billion. By comparison, Google trades at $610 a share, but trades at less than 15 times its 2012 profit estimate and six times its revenue.

Such “multiples” are one of the core ways investors gauge a company’s value, since stock prices fluctuate depending on the number of shares outstanding. Even if Facebook’s $35 stock price looks like a bargain next to to Google’s $610 price, it could still be overvalued relative to its financial potential.

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While Facebook had $1.06 billion in revenue for Q1 of 2012 – a 45% rise from 2011 – the company’s profits fell 12% (to $205 million), according to a recent regulatory filing. This has some wondering if the $11.8 Billion valuation that is expected if all 337 million Class A shares sell for the estimated $28 to $35 that Facebook wants to receive.

With so many people clamoring for the stock, however, the price may initially rise quite a bit. During the next few trading days (and after the weekend), the price will most likely settle according to some analysts. The Financial Times quoted Lise Buyer, an IPO adviser with the Class V Group, as saying,”Because it’s such a high-profile deal, there is reason to think there will be an unhealthy amount of investor glee day one, but we don’t know that will happen.”

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Peter Cauwels and Didier Sornette, econophysicists at the Swiss Federal Institute of Technology in Zurich, crunched some numbers last year and predicted that Facebook’s user growth would eventually quit growing so fast – and that that was a good way to indicate their future revenue possibilities.

In their research – based on the user base at Facebook – Cauwels and Sornette calculated a value for the company based on every user generating $1 profit per year. This is the approximate average each user has made over the last five years for Facebook. This would give the company a valuation in the base case of $15 billion, in the high growth case of $20 billion and in the extreme growth case of $33 billion. Others have valued the company at anywhere from $65 billion to around $100 billion.

Debra Aho Williamson, principal analyst at eMarketer, expects Facebook will use its IPO cash to strengthen its mobile site.

“Facebook has always lagged a little bit behind in delivering a really solid user experience on mobile devices,” she says. “As Facebook moves into markets where mobile is the primary way people access the internet, it is important to deliver a good mobile experience.”

Alongside Apple, Facebook is arguably the hottest company on the planet. But it’s not easy to stay hot (just look at Apple before Steve Jobs came back).

Nearly all of the hot ideas online have come from start-ups, not public companies, and there’s a reason for that. Public companies have to be accountable, and that accountability often means lopping off freewheeling, creative endeavoirs that you hope will make money and concentrating on making cash with what you have.

Google used to boast that staff spent 20% of their time on whatever they wanted. Not any more. Last year it closed Google Labs – “a playground where our more adventurous users can play around with prototypes of some of our wild and crazy ideas.” Labs was culled so Google could devote more resources to “high-impact products” – for which you can read ones that make money.

Is that where the Instagram acquisition comes in? How does that affect the IPO?
Instagram is one of Facebook’s attempts to secure its position in the mobile world. It’s still unclear how Facebook plans to make money off of the deal; Instagram itself didn’t really generate revenue. But by forking over $1 billion for the startup, Facebook is showing it’s not messing around when it comes to mobile.

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While multibillionaire Warren Buffett is non-committal on Facebook’s pending initial public offering, Apple co-founder Steve Wozniak most certainly is not. Warren would wait, but Woz would buy.

Wwarren Buffet, recently told shareholders in his Berkshire Hathaway Inc. that IPOs are almost always bad investments, due to the overblown hype-to-actual value ratio.

The better play, Buffett said later, rather than buying based on the news of the day, would be to try to project how those companies are likely to fare 10 years down the road

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I wouldn’t recommend trying to get in early. IPOs are the textbook definition of an exclusive Wall Street club. Generally, the only investors who really make any money on IPOs are the current shareholders and investors with enough clout or connections to get in before the company actually goes public. These are typically large institutional investors or wealthy individuals who can “flip” the shares once they go public, getting out with a quick profit.

Average folks like us are shut out until after Facebook becomes public, after which it is almost always too late to get in on the stock at a reasonable price.

Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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