May 18, 2012
Let's keep some perspective here. For all the superlatives being tossed around regarding the Facebook IPO – “biggest technology IPO,” “history-making,” “record-breaking” – it's worth keeping in mind just where Facebook fits among the biggest and best companies in the world.
At its IPO valuation of $38 a share and $104 billion overall, Facebook became the 23rd largest company in the U.S. by market capitalization, edging out Amazon.com (AMZN), which has a market cap just shy of $98 billion. Facebook shares opened for trading at $42.05 before settling back above $39 at noon. That level puts Facebook’s market cap at $106.6 billion, neck and neck with PepsiCo (PEP), which was valued just north of $106 billion at the same time.
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So Facebook is definitely in the big leagues on its first day as a publicly traded company, but it has a long way to go to catch tech giants like Apple (AAPL), Microsoft (MSFT), IBM (IBM) and Google (GOOG), or even Intel (INTC) and Oracle (ORCL). Apple remains far and away the market-size leader, with a market valuation that swung back over $500 billion in Friday’s early trading. And Apple shares had lost nearly 17 percent from April 9 to Thursday’s close, slicing more than 120 billion from the company’s market value. In other words, Apple has lost more than the entire value of Facebook in recent weeks and yet still remains about five times as big as the undisputed king of social media.
Facebook doesn’t exactly fit with those other tech names in other important ways. “Many companies with large market capitalizations tend to be mature companies with moderate but steady earnings growth,” writes John Butters, senior earnings analyst for FactSet Research. That’s clearly not the case with Facebook.
When it comes to more fundamental measures like revenues and profits, Facebook is still puny. True, Facebook says it had 900 million active users a month as of March 31 – and probably has even more by now. That's a tremendous accomplishment for a website started just eight years ago by a few college kids, even if they did go to Harvard. And that worldwide familiarity with the brand has no doubt fueled the frenzy that helped Facebook and its executives and investors raise up to $18.4 billion.
Yet for 2011, Facebook's hundreds of millions of users helped the company generate $3.7 billion in revenue (85 percent of which came from advertisers). And it earned $1 billion in profits. At its IPO price of $38, investors are paying about 100 times Facebook's trailing earnings and 54 times its projected 2013 EPS.
Those 2011 results means Facebook wouldn’t have cracked the Fortune 500 – the 500 largest U.S. companies by revenue. Its 2011 results would have ranked it somewhere around 600. (Exxon Mobil, by contrast, topped the Fortune 500 with revenue of almost $453 billion, some 122 times more than Facebook, and made $41 billion in 2011 profits.)
And those other tech giants all tower over Facebook when it comes to those fundamental measures of success. Apple, for example, had $108 billion in 2011 revenue and almost $26 billion in profits. Microsoft had $70 billion in sales last year and $23 billion in earnings. Google racked up $37.9 billion in revenue and more than $9.7 billion in profits. And Amazon.com had $48 billion in revenue, though its profits came in at just $631 million.
Right now, the story for Facebook – and for its hopeful investors – is all about projected growth, not actual results. Analysts on average are projecting that Facebook will grow its annual earnings per share by 38 percent and revenues by 35 percent over the next three years, according to FactSet. That’s higher than the projected growth rates for those more established tech leaders – but lower than the expected earnings growth rates for other social media companies like Pandora (P), Groupon (GRPN), LinkedIn (LNKD) and Zynga (ZNGA).
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“The market may very well enable Facebook stock to rocket ahead of its fundamentals,” Brian Wieser, an analyst with the Pivotal Research Group, wrote in a mid-day note to clients. Wieser put a “sell” rating on Facebook stock. “While we consider ourselves optimistic on the company’s underlying business opportunity and regard its prospects for durable success as favorable, we view shares as being ‘priced for perfection,’” he wrote.
That may be the bottom line here: Facebook’s market cap might put it in the ranks of some of tech’s biggest companies, but whether it truly deserves to be there won’t be determined for quite some time.