Facebook Ready for IPO

Facebook is just about ready to file for IPO. Morgan Stanley is said to be hired to structure the offering that could see Facebook raise more than $5 billion and see the company formed in 2004 be valued at as much as $100 billion. Most of Facebook's revenue comes from advertising, and that figure was $3.8 billion in 2011. Research firm eMarketer estimates that revenues in 2012 will increase over 50% to $5.78 billion. In the days leading up to today's public filing, much talk has been centered on this $100 billion figure.

Facebook will be three times more expensive than Google was during its IPO. Given Facebook's $3.8 billion revenue and $100 billion valuation, that is a price-to-sales ratio of around 26. For comparison, a Market Watch article discussed valuations of 76 IPOs from companies with at least $3 billion in sales in the 12 trailing months up to IPO. The results reveal that their average price-to-sales ratio was around 0.7, meaning that Facebook's ratio is nearly 40 times that of comparable companies at the time of IPO. Google, to which Facebook is often compared to, had a price-to-sales ratio of 8.7 during its IPO, or nearly 1/3 that of Facebook. According to the latest financials, Google in 2011 had $37.9 billion in revenue. Its latest market capitalization value is $188.61 billion, or about 5 times its latest annual revenue. For Facebook, even with the 50% growth estimates from eMarketer for 2012 revenues, the $100 billion valuable will be over 17 times the annual revenue.

The high valuation of Facebook may rest on the anticipation of continual fast growth. However, the $3.8 billion revenue in 2011 missed the forecast of $4.3 billion from eMarketer. Zynga, one of the biggest advertiser on Facebook, began trading on NASDAQ last December. Up until this past week, its price was consistently below the initial pricing of $10; the recent spike may be attributed to the imminent IPO of Facebook itself. Finally, eMarketer forecasts that growth rates of Facebook's ad revenue worldwide will drastically decrease from 152% in 2010 to 21.1% in 2013.

In an article written by Business Insider and posted on Yahoo, the $100 billion valuation was defended on the basis of Facebook's control of traffic on Internet, personal identity data, and the biggest social platform. Based on these three criteria, the future cash-flow discounted to today's value makes $100 billion a plausible amount. Facebook's high valuation rests on its continual fast growth. That success will ultimately determine whether the $100 billion valuation is appropriate or not.

Sources:

• http://www.bloomberg.com/news/2012-01-31/facebook-said-to-hire-morgan-stanley-to-lead-social-networking-site-s-ipo.html
• http://www.forbes.com/sites/roberthof/2012/02/01/the-100-billion-ipo-question-can-facebook-keep-growing-fast-enough/
• http://www.emarketer.com/PressRelease.aspx?R=1008601
• http://www.marketwatch.com/story/facebooks-ipo-will-be-way-overvalued-2012-02-01?reflink=MW_news_stmp
• http://money.cnn.com/2012/01/30/technology/facebook_valuation/index.htm?iid=HP_LN&hpt=hp_bn6
• http://finance.yahoo.com/news/think-facebooks-100-billion-valuation-154541942.html