If you’ve been following finance news over the past couple of weeks, you would have likely read the headlines about the much anticipated Facebook Initial Public Offering (IPO).  With Facebook having the largest social network in the world with over 840 million active members and growing, they are moving towards Google like dominance, which has brought the interest of investors worldwide.

So what is an IPO?  It’s basically a way for a company to raise money by issuing shares to public markets.  In the process, it can make existing shareholders very wealthy.  In this case, Mark Zuckerberg, Facebook founder and CEO, will likely become one of the richest people on the planet.

How rich?  The $5B IPO will place Facebook at a valuation of $85 Billion to $100 Billion – yes with a B!  With the Mr. Zuckerberg retaining 28% or so of the company, it will bring his ownership stake up to $28 Billion promoting him to the top 10 list of the worlds richest people.

Back to the business itself, how does Facebook monetize their 840 million active members?  Like Google, Facebook has monetized the traffic on their site with ads.  While Google displays customized ads based on search results, or website content, Facebook displays ads based on demographics.  What makes Facebook attractive to advertisers is that they can tailor their ads specifically to their market.  For example,  a company could target and display ads specifically to 20-25 year old males, from Canada, educated, and only pay when their targeted audience clicks their ad.

How much revenue does Facebook generate?  In 2011, it’s reported that they generated over $3.71 B in sales, up over 88% from a year earlier.  After all expenses, net earnings are reported at $1B, up 66% from 2010.  With $1B in earnings, that brings a price/earnings multiple to an insane 100 assuming that the valuation reaches $100B on IPO day.  It’s starting to feel like the late 1990’s all over again!

Although valuations are sky high, it’s hard to ignore how much Google appreciated after their IPO in 2004.  The stock started trading in the $90’s and today, it’s a $600 stock.  A six bagger in seven years which is about a 31% compounded annual return.  Mind you, Google valuation is much more conservative at 20 times earnings (~$200B market cap).  Could Facebook take the same path?  Only time will tell!

Back to you, will you be buying Facebook on opening day?  Do you think that it’s over valued?


  1. Steve on February 6, 2012 at 10:39 am

    Lots of comparisons between Google and Facebook these days. Facebook is NOT Google despite both receiving most revenue from advertising, nor do they have the earnings growth potential.

    Google inherently is a infrastructure company. Search engines, browsers, mobile OS, etc. THere is nothing that is fashionable or trendy about any of it, so it will not go out of style as long as it stays technically competitive. Companies in these areas fail due a technically superior competitor (e.g. Google vs Webcrawler vs Altavista).

    The whole problem with Facebook is it is purely social media which is inherently like fashion, and will become passe when the next best thing comes along. Kids under 10 today will think Facebook is totally lame in a few years, in favour of some new media site.

  2. Joe on February 6, 2012 at 11:31 am

    NOOOOO. GOD NO. The PE ratio is 75. Did we learn NOTHING from the tech bubble? The only people making money off this will be investment banks and early flippers who take capital gains from The Greater Fool. I joined Facebook in January 2006, as a 1st year university student, when it was cool. It subsequently became uncool and people in the attractive demographics are using it much less. There are many reasons that Warren Buffett doesn’t get into high tech or IPOs with ridiculous P/E ratios. Good thing there are gamblers out there; it means that value investing (dividend investing) can still offer above-average returns which flies in the face of Efficient Market Hypothesis.

  3. SavingMentor on February 6, 2012 at 11:50 am

    Doesn’t sound like a very good buy to me but it will probably do better than some of the investment choices I’ve made. I can’t wait to look on from the sidelines!

  4. DanP on February 6, 2012 at 12:41 pm

    I wouldnt compare this to google at all. This is more comparable to LinkedIn`s IPO. Similar format…..but now that`s a huge PE ratio. According to google, LinkedIn`s current PE ratio is into the 1000s. So maybe facebook could sky rocket the first day it`s out….

  5. Gemma on February 6, 2012 at 1:43 pm

    As finance news goes this was quite a shocker. I wouldn’t think this was the best of investments but I’ve no doubt it will still do well.

  6. Fit on February 6, 2012 at 2:05 pm

    tough to say, crazy valuation but it has made its way into every part our live. People use facebook for interaction, not so much for “products”. I look at people I know still in university and high school… or even my parents…. they never click on the ads…ever. I am not saying the business model won’t work, just that they need to optimize it. Almost a billion “customers” and only a billion in revenue?

  7. Robert on February 6, 2012 at 2:18 pm

    I don’t think the normal people can buy stock with this IPO. You will have to wait until the stocks start trading outside the big brokers, in the general public. By then the price will have increased a significant amount and it won’t be a good deal anymore (if it really was in the first place, that’s another question).

  8. SomeDude on February 6, 2012 at 2:18 pm

    might buy some shares just to satisfy the gambler in me and play the speculation game a little. i’m FAR from an expert on investing, i have no pertinent opinion on if it would be a sound investment but the comments above (especially the differences between google and facebook) are very interesting. ultimately, i don’t understand it too much so i wouldn’t invest in it.

  9. Poor Student on February 6, 2012 at 2:42 pm

    I have heard from a lot of people that have concerns over it. I might buy a few shares, strictly as a gamble. I use facebook and I would say 98% or more of everyone I know does too. It isn’t going anywhere any time soon. I really like the ads on the sides and click them often. facebook gives you the chance to tell them that certain types of ads do not interest you so now most of the ads I see are offering me something free. The tailor made ads are a great idea and I think may become very valuable.

  10. Bryan on February 6, 2012 at 3:52 pm

    Not a chance. With P/E so high it would have to continue to grow it’s earning at a enormous pace. However it already has over 800 million users, and is going to reach a wall soon. Where that user wall is I’m not sure. Maybe 2 billion, maybe even as high as 4 billion, but even that would only be barely enough to bring P/E into the 20s, and that would be assuming the price didn’t go up! The valuation just isn’t there.

  11. My Own Advisor on February 6, 2012 at 5:44 pm

    Nope, won’t be buying :)

    I wonder how many users it will eventually have? 1 billion? 2 billion? Far too speculative of a company for me.

    I’ve read too many investing books that say the “average” investor should avoid IPOs at all costs. This is another example.

    How about you FrugalTrader, are you a buyer?


  12. FrugalTrader on February 6, 2012 at 6:20 pm

    The valuation is a bit rich for me right now, so I’m more wait and see. I think that they will figure out more ways to monetize as now they will be focused on earnings.

  13. Emilio on February 6, 2012 at 7:55 pm

    I would rather place a bet on Partybets.com

    At least if I bet on tenis I can count on Federer or Nadal, whose skills are far superior to a pimply faced Zucheberg…

    /made a killing betting on the Giants last night…

  14. Sarlock on February 7, 2012 at 2:39 am

    Since revenue expansion from increasing user base has a limit that isn’t too far in the future (doubling the number of people on Facebook would be impressive and likely not be able to surpass 2-3 billion tops) so all of the earnings will have to come from expanding the business and producing income streams that run alongside their current business model. Possible? Absolutely. But it may also be very difficult. With a P/E of 75-100, you expect to be buying in to a company that has the potential to 10-20 times its earnings over the next 5 years… and that isn’t likely to happen with Facebook.
    Too overpriced for me.

  15. Marianne on February 7, 2012 at 1:01 pm

    It is interesting to read about the difference of advertising between Facebook and Google. I always thought the Google Ads were a bit redundant because often they just show me ads about stuff I already know about, having already visited the sites etc. (ie. I am an ING client and they are constantly showing me their ads). The Facebook ads are sometimes more relevant because they show me stuff that I am not already aware of that I might actually be interested in.

  16. ETFincomes on February 7, 2012 at 1:02 pm

    No No, too rich, even if it runs up 100%+ increase on the first day. I just rather have safe income investment, that’s my style.

  17. Brad Ferris on February 7, 2012 at 5:05 pm

    WAAAAAYY too expensive MDJ.

    As a value oriented investor there’s no way I can justify the price and I seriously question their ability to execute at the forward ratios they’re valued at.

  18. Facebook Investor on February 8, 2012 at 12:52 am

    The opportunities are extremely tempting but as many have pointed out Facebook’s IPO will have a ridiculous P/E of which Apple still trades at less than 20!

    Here’s my take: http://youthfulinvestor.com/invest-facebook-ipo/

    Facebook is a hot company and it is the second most visited website daily behind Google. I think that just because the use of the site is trendy does not mean we can discount its power to branch out from there. I find it rather likely that the money raised from the IPO will work towards just that.

    I strongly believe Facebook is hiding several competitive ideas before releasing them beyond social media. These could be search, they could be mobile, they could be cloud. They would be absolutely foolish to stay strictly in social media.

  19. Andrew F on February 8, 2012 at 2:57 pm

    FB has over 800 million users. There are only about 2 billion internet users in the world at the moment. It is going to be very difficult to double the user base from here, and most of those incremental users will be lower value (people in countries with low GDP/capita).

    So, to get a reasonable valuation, you have to see a way from Facebook to increase profit per user by a factor of 10. I’m just not seeing it.

  20. Joe S on February 9, 2012 at 9:18 pm

    Google’s P/E is actually much lower, because they hold so much cash which is part of their market cap. Google, MSFT, Cisco, Intel and Apple are great stocks with good growth and good P/E – subtract the cash and you’re looking at an average of around 10. They will likely outperform Facebook by a huge margin over the next 5 years.

    In 5 years, when the hype falls, revenue stabilizes and growth wanes, Facebook may be a good stock. A good buy at 20 P/E, a terrible one at 100.

    Will check back to this post in 5 years and let you know :-)

  21. Zdenek on February 13, 2012 at 5:25 pm

    Steve and others. Yes Facebook is not an infrastructure company but that will all change. Such innovative companies with many will quickly expand to all kinds of areas.

    Just look at Amazon – initially book seller and now they host cloud computing and sell tables.

    Same with Google – they are now starting to develop and sell hardware devices and are building first major hardware test labs. They even start laying down their own optic fibers in Kansas city and elsewhere. Thou they started as a search company.

    Facebook is a monopoly in social media which is one of the biggest threat to Google and others and it allows Facebook to capture completely new markets. Going from 800 to 2 billion or more users should not be a problem.

    The only real threat to Facebook is growing Google Plus user base.

    I will most likely buy their stock for short term trading while people get super excited about the stock. I think I will get high return.

  22. Zdenek on February 13, 2012 at 5:33 pm

    sorry a few corrections:

    Such innovative companies with >>lots of money<>tablets<<.

  23. The Passive Income Earner on February 28, 2012 at 9:52 pm

    Too much valuation and too much dependency on gaming. 12% of their revenus came from Zynga and Zynga is not exclusive to Facebook anymore. There are also many gaming platforms for the web being created – Gree in Japan is one example.

    The users expect everything for free and I am not sure how they will monetize for growth.

    You can certainly count me out.

  24. Zdenek on February 28, 2012 at 10:53 pm

    I still remember many people said about Google similar things. Oh they only have advertising revenues so no good. The stock will never hit $200. Look today.

    The important thing is whether the company is innovative and how large user base with investment (in terms of uploaded pictures and relationships) they have.

    I don`t like Facebook at all but I plan to make some money on them.

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