Despite the worrisome erosion of equity markets anticipating renewed recession, Facebook’s impending IPO has the media in thrall, not to mention its own 900 million members.
It’s a small float (18-25%), so if just a small fraction of its fan base (a.k.a., the hoi polloi) try to snag some shares at market rate, the stock will be pressured to rise well beyond the initial $28-35 range set by the company. The payoff will be huge for early investors and insiders in any event. That sound you hear is Ferrari dealers and Realtors smacking their lips.
Facebook may be a dubious investment of your time, but is it a good place to park your dollars (setting aside the notion that time itself is money)? Facebook’s annual revenues last year were $3.7 billion — impressive for such a young company, but does that justify $100 billion in market value? As financial writer Henry Blodget has noted, at even $35 a share Facebook is priced at 11 times an extremely aggressive estimate of what earnings per share (EPS) might be in 2016. Apple is priced at 11 times this year’s earnings; Apple has 35 times as much revenue as Facebook but only five times the market value — and Google is worth only $200 billion on $40 billion in sales. Note too that an unusually large percentage of Facebook’s IPO shares will be coming from insiders and early investors, not company coffers. Why do they want out so soon? Maybe the sound they hear is a pop.
Facebook will try to keep the music playing by using its windfall to fund ambitious expansion, much as Google did after its 2004 IPO. Facebook is already throwing cash around (like spending $1 billion to buy Instagram, a new firm with a couple dozen employees and no profits). We’re also seeing such “innovations” as the compulsory Timeline, which records more of your life on the website, the better to sell you to advertisers and to commit you to the service. They wouldn’t want you to be tempted by a competitor, should one arise.
And one probably will. After all, Facebook wasn’t the first to run out onto the social networking field, or even the second. Remember Friendster? Remember MySpace? Facebook is a great company and deserving of awe, but if it came out of nowhere then why can’t something else appear to supercede it? (Let’s face it: Eliminating a future competitor was the real reason for snapping up Instagram. How long will Pinterest stay independent?)
Regardless, Mark Z. will be one wickedly smart and astoundingly wealthy dude, selling down his holdings to one-fifth of the company while continuing to control more than half the voting rights. He’ll never want for hoodies.