Facebook: Will its IPO be a success at the Street? – Part 2

Facebook has “revenues,” not profits, of $4.3 billion. If the company becomes valued at $100 billion, and had zero expenses, it would take you 23 years to get your money back. Of course, there are expenses, which means that profits are a lot less, last year around $1 billion. So, at a valuation of $100 billion, that’s a lovely P/E ratio of 100.

How about cash flow? At $100 billion valuation, the company’s valuation of price/cash flow is eight times more expensive than Apple. And Apple has almost $100 billion of cash in the bank.

The capitalization valuation would put it about the same as McDonald’s, which at least has products you can eat. It would be almost twice that of Boeing, whose products you can fly. At Facebook, you can post your mug shot.

Have you noticed all the hype about the “largest IPO at $100 billion.” Well, it isn’t. The company is raising only about $10 billion, not $100 billion. But we have to forgive Wall Street, which desperately has to generate some excitement as their profits are dwindling. Therefore, being a sceptic at this point could be somewhat dangerous.

For Wall Street, it is extremely important to make this offering very successful. There are already more than 200 IPO’s in the pipeline. This one will set the tone. Therefore, it will be strongly supported by the participants. We have all heard the stories of hedge funds getting IPO allocations with the proviso that they will be buying the stock when it starts trading.

But eventually a matter of demand/supply will come into play. Market forces cannot be repealed, only delayed.

Does anyone remember the most popular social media site a few years ago, MySpace? Does anyone go there anymore? Of course, that doesn’t imply that Facebook will meet the same fate, just that this is a fickle business.

It’s always possible I may be wrong. Perhaps “this time it’s different.” But those are risky words. For now, my bet is that when the Facebook IPO is done, the three year rally in the stock market will be in trouble as well. The insiders of Facebook have an exit strategy. Do you?

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Posted by Usman Khalid on Jan 31 2012. Filed under Business. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.