After much speculation and a long anticipated wait, Facebook filed IPO registration documents on 1 February 2012 with the Securities and Exchange Commission. Facebook says it plans to raise $5 billion, but funds raised could go up to $10 billion. This would make this biggest IPO in Internet space ever.
Facebook’s IPO filing made it possible for the public market investors to examine the company’s books. Facebook said it earned $1 billion in profit on revenue of $3.7 billion in 2011.
How does this valuation compare with valuation of other iconic tech giants like Google and Apple? Facebook’s valuation is 100 times earnings or 27 times annual revenue, as against a stock market that is currently trading at 12 times earnings. This seems over hyped and puts retail investors at risk. Facebook users feel strong emotional connections to Facebook, which could attracts many retail investors, who may fail to evaluate the IPO diligently and unemotionally. Apple Inc went public at a valuation of $1.19 billion in 1980, equivalent to 25 times revenue and 102 times earnings. Google valued at $23 billion at the time of its 2004 debut, or 218 times earnings. Viewed against valuations of Google and Apple’s IPO, Facebook’s does not seem overvalued.
The 100 times historic P/E of Facebook's IPO seems unrealistic, seen in context of Apple - with nearly $100 billion in cash and securities – trading at a forward price-to-earnings ratio of 13 times.
While retail investors are still crunching the numbers and doing due diligence, institutional investors have quietly bought Facebook shares through private pre-IPO exchanges like SharesPost and SecondMarket. About 50 equity funds of the 3,842 disclosed holdings of Facebook stock, led by Morgan Stanley's institutional Opportunity H fund with 3.5 per cent of its $242 million portfolio invested in Facebook.
Morgan Stanley is the lead book-runner for the IPO. Goldman Sachs. Bank of America Merrill Lynch, Barclays Capital and JP Morgan will also participate on the deal. Can their due diligence of this IPO be trusted. Recall that lead under-writer’s Morgan Stanley, Goldman Sachs and J.P. Morgan Chase and Bank of America were responsible for the US housing mortgage over-valuation racket worth over a trillion dollars for nearly two decades
A major risk factor is that Facebook founder, Mark Zuckerberg, owns 28.2% of Facebook shares, the largest single stake in the company Mark controls 57% of the voting shares after other shareholders granted their voting rights to him by irrevocable proxy. Directors and shareholders will have less sway over the company's direction.