Sometime in 2012, Facebook is planning an initial public offering of stock and will be the next internet and social media company going public -- so what can we learn from the LinkedIn IPO that took place in spring of 2011? First of all Facebook is not LinkedIn -- so the Facebook IPO should be different. The number of people using LinkedIn on a regular basis pales in comparison to Facebook’s daily users. And since Facebook users typically post personal, family, and friend-related updates, photos, and links - they have more reason to regularly sign on. If you don’t know, LinkedIn centers itself around professional contacts and networks, allowing users to essentially post a profile page that is a de facto resume. It is meant for facts related to a LinkedIn users work and educational history -- including positions held and job responsibilities. From those credentials - groups, networks, and contacts are made with other professionals and business contacts. It’s also interesting -- and valuable -- as one of the few foreign social networks in China, where LinkedIn’s has around one million users.
LinkedIn Corp’s IPO (ticker symbol: LNKD)
I’m sure they consider it a success... But the LinkedIN (ticker symbol: LNKD) could be considered a failure of an IPO, since it is down 22.46% since it’s IPO (as of 12/23/12). According to Google finance, the $73.08 share price on LinkedIN makes it a $7.05B mid cap stock with a 1444 P/E ratio. (Yahoo finance shows a 1001 P/E, which is why I like to check both.) That’s really pretty expensive unless LNKD’s earnings really grow from this point forward.
Since Yahoo finance’s forward P/E estimate for LinkedIn is 128 (fy 2012), and they apparently have no debt, it’s possible that LinkedIn might deserve their recent buy rating from Canaccord Genuity. The lesson here is not that they couldn’t grow into this premium valuation -- but rather that there were many chances to buy the stock lower than the post-IPO price since May 2011. The actual IPO price was $45 -- closing on the first day of trade at $94.25. There were days in late November when investors could have bought the stock for $56-59 a share. Some on Wall Street see the possibilities of all that traffic, those people and their networks, and realizes that their might be different or increased monetization strategies going forward and new revenue models.
What does all this tell us about Facebook going public -- if the two are such different companies?
Facebook Valuation - Facebook will likely get an initial valuation of about $80B - $100B, and that number might move based on the hype of the initial public trading frenzy. This huge number has already made some wonder if we are in a new internet bubble! Watch this Facebook market cap number closely around the IPO, because it will take years for Facebook to deserve an overinflated valuation -- or the stock will tank after all the quick money has been made.
Once the IPO documents have been prepared and released, be sure to read them closely to understand exactly how Facebook makes money. What are their revenue streams (online games like Zynga [ZNGA], display ads from Microsoft [MSFT], and more)? Where will the future growth of Facebook's revenue come from, and how much do they value each user? What is the click-through-rate on their display ads... etc, etc? These could be factors into the future value of Facebook.
[Here's a crazy thoought for you: I've written elsewhere on the web recently that this $100 billion dollar valuation means that Facebook -- at this rate -- will be worth more than Kraft Foods (ticker symbol: KFT) and FedEx Corp (ticker symbol: FDX) combined! Seriously if you were a billionaire with money to spend, would you buy both all the shares of both of these companies -- I think Kraft (owning Oreos, Cadbury, Chip's Ahoy, Cracker Barrel, Crystal Light, Halls, Honey Maid, and Nabisco, and more) is in every aisle of every supermarket!, and Fed Ex is the heart of modern business -- or would you want to own all of Facebook? Hmmmmm.
Facebook IPO Price - For reference the private shares now selling on SharesPost are between $32 and $34 per share, with an approximate $80B market capitalization. This is your reference point for the IPO. Why not buy them now from employees and other insiders in the private market? Are you an “accredited investor” of more than $200,000 in annual income for the last two years, or net worth greater than $1 million dollars? If so, then go ahead if you think $80B market cap makes sense. (Update: As of January 25, 2012 -- Facebook's lawyers have initiated a three-day suspension of Facebook shares on the secondary market -- SharesPost and SecondMarket! That probably means that news is imminent.)
Facebook IPO Date - Facebook and its underwriters will likely choose the best point on the calendar for the launch of the shares - the initial public offering. The old Wall Street adage of “trade in May and go away”, might get this Facebook IPO done in spring (late May!), before the real decision makers of institutional money pull back and leave for their summer schedules. If the market itself is bad, choppy, or overly volatile -- or if Europe or some other dark clouds are pressuring our markets -- expect that they’ll wait as long as the regulators allow. (They have to IPO within a certain time period after crossing 500 shareholders).
Facebook stock might be worth buying --- maybe six months after the IPO. Watch for the overall valuation of the company, and do your own research -- and consult your own advisors -- before you commit any risk capital to any investment. [So what do you think the Facebook stock symbol or ticker symbol will be? I guess ticker symbol: FCBK!]