Friday, 18 May 2012

Will You Buy Facebook, the Largest IPO of All Time?

Are you ready for the largest IPO of all time? Well, you'd better be.  No matter what you choose to do with the decade's hottest IPO, you deserve as much information as possible. 

But there's more than one way to value an IPO. Most of us are more interested in how much value that initial offering places on the entire company. By that measure, Facebook is head and shoulders above General Motors and every other "biggest" IPO that's come along in recent years:


We know Mark Zuckerberg started the site at Harvard in February 2004. Now, 99 months later, it's worth $100 billion. That's an incredible amount of value to create in a relatively short time, but I didn't truly appreciate how outsized that valuation was until I compared it to these former IPO champions and the length of time each took from founding to reach the IPOs that earned them so much.


How did Facebook's tech peers begin their public lives? In every case (even Google's), far more humbly:


Apple and Microsoft were '80s kids, debuting in 1980 and 1986, respectively, but they represented high-water marks for high-tech interest in their days.
If you'd like to think that Apple was more reasonably valued than Facebook at their respective debuts, you're wrong. Facebook's IPO valuation is actually in line with many of its high-tech peers, including two that didn't wait for profitability before going public:


With the benefit of hindsight, we can see that most of these companies were bargains at the time, and continued excellence has brought early shareholders some amazing gains:


With the exception of AOL, which has fallen on some hard times of late, and, a longtime high-valuation stock, major tech companies that survive the ravages of age have all seen their valuations shrink and their gains explode. Google, with the least growth of the bunch, has still been a six-bagger for IPO investors. Apple has earned its earliest investors 290 times their initial investments, while Microsoft has a cumulative return of more than 33,000% since going public.
Is there anything left to "like"?

For those of you expecting huge returns from Facebook, here are a few sobering numbers to consider -- assuming, of course, a $100 billion debut that isn't pumped to the moon by rabid demand. For your investment to offer Google-like returns, Facebook would need to be worth more than $600 billion, a market cap no company has held for very long. To approach even Yahoo!'s post-IPO growth, you'd need Facebook to be worth more than $2 trillion. And to become the next Microsoft in terms of share-price appreciation, Facebook would have to someday be worth $3 quadrillion dollars. Good luck with that.
Perspective is important when considering the growth prospects of any hot IPO, and Facebook's public debut will demand it. Do you believe that Facebook can be the next Google, AOL, Apple, or Microsoft? I don't.


Marcus Lim said...

this article is so true! everyones shouting their heads off screaming fb is too expensive, profit visibility is dim, etc etc bla bla bla.. but what they dont know (or forgotten) is that fb's peers in IPO i.e. microsoft, yahoo, google and apple for instance were listed at equally high valuations and yahoo and amazon were not even making any profits when they listed...

i guess it is just the nature of the tech companies, you buy their "hope"...

on the "sobering" numbers to consider, fb may not necessarily need to be worth a market cap 6 times to $ 600 billion if they could instead grow their earnings by 6 times ! thats exactly how PE ratio works

not forgetting the fact CHina currently bans fb, any positive development on this market is unimaginable!

Jamie Calston said...

It's interesting to hear different people's conflicting views on why or why not to invest in Facebook .. I tend to think, if it is a stock that might be profitable to own, then why not?