May 18, 2012
The most important and most watched numbers on Facebook’s massive IPO are all in – all but one that is.
We know that Facebook’s underwriters priced its stock at $38 a share, at the top of the higher new range they had established only days earlier, and sold a total of 421.2 million shares, 25 percent more than originally anticipated. That means that the IPO raised $16 billion for the company and its investors, and could still raise $2.4 billion more if underwriters sell their overallotment shares. And it gives Facebook a market capitalization, before it begins trading, of an astonishing $104 billion. Its IPO price mean investors have priced it at 100 times its earnings for the last 12 months, at a time when the price/earnings multiple for the S&P 500 index is closer to 14.
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The only number we don’t yet know: Just how big will the “pop” be in Facebook’s share price when it finally begins trading on the Nasdaq Stock Market at 11 a.m.? That’s the number that seems to matter most to the traders, investors and pundits taking to the airwaves to comment on the largest technology IPO in history, a transaction that is nearly four times the size of Google’s (GOOG) $24 billion public offering in 2004.
But what happens to Facebook’s share price in its first day of trading isn’t that significant. Don’t misunderstand me: it matters a lot to all of those people who battled or wheedled underwriters into handing over an allocation of Facebook stock at the IPO price. The bigger that “pop,” the smarter they look and the larger their potential profits. But a big pop isn’t going to be enough to make Facebook a real winner.
The numbers that really matter will be those that begin trickling in over the next three to six months. By then, any initial euphoria surrounding the IPO will have dissipated, and shareholders, having paid a very hefty valuation to take part in what seems likely to end up as the most buzzed-about IPO of the decade, will turn an eagle eye to the company’s financial information and any other numbers out there that might confirm they made the right choice.
There are some reasons for suspecting that those documents might not all make for happy reading.
First of all, there’s an early number: $10 million. That’s how much advertising revenue Facebook lost when General Motors (GM) announced that it was dropping its entire budget for Facebook ads. That’s a drop in the bucket for Facebook, and the company may yet prove to be a complete game-changer for Madison Avenue. But if that happens, it will be because of a change in another worrying number: 57 percent of those who responded to a poll by CNBC and the Associated Press said they never clicked on display ads on Facebook (while another 26 percent admitted they do so only infrequently). Amidst all the IPO hullabaloo, those numbers have been dissected, but they haven’t emerged as major sources of concern. If they continue, you can count on the level of alarm growing quickly.
Putting Facebook's IPO in Perspective
Another number that might cause concern: 45 percent. From the first quarter of 2011 to the end of the first quarter of 2012, that is how much Facebook managed to increase its revenues. Not that shabby, you might think – until you realize that compares to 88 percent revenue growth in 2011 over 2010. Then there’s 36 percent: That’s the company’s operating margin as of the end of March, down from 53 percent a year earlier. If Facebook can demonstrate that it can continue to increase its earnings at a healthy pace – as its massive P/E multiple suggests investors are expecting – a slowdown in the rate of growth in revenues may not matter too much.
There’s one more group of numbers that may cast a shadow over how Facebook’s stock is doing by Labor Day: $10 billion and 91 days. The $10 billion refers to the value of the stock (at the IPO price) that insiders will be able to sell once the initial lockup period ends – a stretch of time that in this case is only 91 days after the IPO, rather than the traditional 180 days. Facebook revealed in a final filing that it would enable insiders to sell a greater percentage of their shares earlier, a move that could have outside investors cooling their heels until it’s clear how much selling pressure may come from those individuals. Lockups can cast a long shadow, and coming on the heels of the news that some marquee name insiders, like Goldman Sachs and venture capitalist Peter Theil, are cashing in a significant portion of their chips. Add another worrying number: an extra $3 billion of insider selling hitting the market immediately.
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Between now and the end of the summer, we’ll have more data points to mull over. There will be another quarter of earnings, along with any guidance that management provides. Analysts will begin releasing their first reports on the company, along with earnings forecasts and price targets. We’ll see if other advertisers follow GM’s lead, or whether they stick around, and have a chance to gauge whether the insiders will start selling. We’ll see how the price reacts to both industry and macro-economic news, and develop a better understanding of its trading patterns and liquidity. All of those numbers will help patient investors determine what Facebook is really worth, once all the noisy festivities are over and done with. I’m not an investment analyst (nor do I play one on television), but Reuters BreakingViews suggested in a recent eBook that a more appropriate valuation for Facebook might be a number that is closer to $65 billion than $100 billion.
That’s not to say that Facebook is doomed to trade beneath its IPO price, following in the footsteps of Zynga (ZNGA) , Groupon (GRPN) and others. (Right now, of the recent major social networking IPOs that have made their debut in the last two years, LinkedIn (LNKD) is one of the only ones with a share price that is now higher than the IPO price.)
After all, the company has one big number in its favor: 900 million. That’s how many of us have signed up for a Facebook account and keep hanging around, playing Farmville, “liking” our friends’ baby pictures and broadcasting our plans for dinners and vacations with a cheery disregard for privacy issues. Many investors who do want to own Facebook say that number is the most important of all – well, that combined with their conviction that the company’s managers will eventually figure out a way to make far more money off each one of us than it is currently doing.
Whether Facebook will really be able to do that will be a story written over the coming weeks, months or yes, years. So don’t place too much importance on any one-day “pop.”