Have you heard the latest rumor? Facebook could sell shares to the public in an IPO — valuing the social network from $75 billion to $100 billion — sometime between April and June. But there are four good reasons why this will be a non-event.
Even though I am not among its 800 million users, Facebook is profitable. It sells advertisements directed at those users and eMarketer estimates that between 2009 and 2011, Facebook’s revenues grew at a 127 percent annual rate to $3.8 billion in 2011 with operating profit of $1.5 billion, according to BusinessInsider.
So why is one of history’s biggest IPOs a non-event? Here are four reasons:
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- It’s grossly over-valued. On a price/sales basis, Facebook would trade at 19.7 — that’s 497 percent higher than Apple at 3.3 and 294 percent above Google’s P/S of 5. And assuming Facebook shares Google’s net margin of 26 percent, Facebook’s P/E of 80 is far higher than Google’s 19 or Apple’s 12.7. This means that Facebook’s stock might not hold up after the first-day IPO pop — the same fate that greeted most of 2011′s tech IPOs.
- It won’t unleash corporate capital spending. In 1995, Netscape’s IPO spurred a wave of corporate capital spending. That’s because the web browser made the Internet easier for people to use than it had been before. A wave of supporting industries ranging from web consultants to makers of Web infrastructure — that got their fingers into the corporate Internet investment pie, as I described in my 1998 book, "Net Profit." Facebook is not doing that — its revenues represent a mere 1 percent of the world’s $507 billion in total ad spending and its IPO would not lead to a major change in the trajectory of corporate spend.
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- It doesn’t change much for Facebook insiders. Facebook’s investors and employees were able — until last week when trading there was halted — to sell their shares for cash on SharesPost, a secondary market. On January 26th, Facebook was valued at $73.4 billion there — a few billion below the estimated IPO range. Sure, an IPO required by topping 500 shareholders will add to Facebook the cost of running a public company — but beyond that, things there should not change much.
- It won’t boost the overall venture financing market. If a Facebook IPO created a fever to invest in tech start-ups, it might be good for the venture capital industry. But since the IPO does not change much for Facebook investors, does not spur the growth of a range of related industries, does not unleash corporate investment, and might not even help out the IPO market, the after-effect of Facebook’s IPO could be modest.
It is popular in the media to compare the Facebook IPO to that of Google whose price has risen nicely since its 2004 IPO from $84 to $580. That 30 percent compound annual growth is good — but Google trades 19 percent below its 2007 peak of $715.
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To be fair, there is a bit of good news for those hoping that Facebook stock will climb after it goes public. A quick look at Google’s 2004 prospectus reveals that its IPO price of $84 valued Google at a P/E of 80 — the same as Facebook’s estimated P/E (Google had 271 million shares and estimated 2004 net income of $286 million at the time of its August 2004 IPO).
That’s the only glimmer of good news for why Facebook’s IPO might breathe some life into the business of VCs and tech entrepreneurs. But Facebook’s inability to transform the way companies operate their business means that it will remain a niche phenomenon in the grander economic scheme.
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