Facebook (stock symbol: FB) was valued at $104 billion ($38.00/share offering price) in an initial public offering on Thursday and will begin trading at 11 a.m. today. The company raised $16 billion, which, in part, was used to buy back stock from employees and original investors. All of those in this group will record significant profits.
New technology offerings have often experienced large initial increases in their stock prices, as most have been hyped by promises of high growth and profitability. No other company in history has been hyped more than FB. So, the question is: Will FB be able to post revenue and profit growth that justifies such a healthy valuation?
By comparison, FB investors are paying $100.00 for each dollar of profit FB earned last year; Google investors paid $120.00 when it went public. NYSE companies have significantly lower price earnings multiples. FB posted $3.7 billion of revenue and $1 billion of profits last year.
The first day trading prices are an important event for a new IPO. At the height of the Internet bubble in 2000, the average technology stock rose 87 percent on its first day. The trading ranges for those companies were all over the lot since then. The New York Times has an excellent chart in the Business Section that shows the winners and losers three years after their IPOs. Google, Amazon, Yahoo, and eBay led the list with increases ranging from 398% to 3,590%.
Will FB stock perform in a similar manner? The answer is a resounding, "Who the hell knows?" The company has some distinct advantages including a financial statement with revenues and profits. Many companies during the Internet boom went public before they had revenues, much less profits. Also, FB has 900 million customers. It appears that a significant growth rate is still possible given that there are several billion people in the world who have not yet signed up for FB.
But there may be some potholes on the road to a higher stock price. First and foremost is FB's ability to generate growth that justifies its stock multiple (that would be 100 times at the moment). General Motors has become skeptical about the advertising advantages of using FB, and GM is one of the largest advertisers in the country. FB is a young company with many unproven executives, most notably its CEO. Do these men and women have the skills and fortitude to move FB forward at warp speed? Time will tell.
Facebook stock will be sold by many employees who will become very wealthy. The ones receiving the most money are the critical employees. Sometimes wealth dilutes a person's drive. Also, many of the earlier investors will be cashing out a large number of shares. This is always a red flag, although it is perfectly logical, honorable, and wise for them to do so. And finally, institutional investors who received large allocations in the IPO may dump the stock if it moves rapidly today causing some downward pressure. If the demand from people who want the stock is not great enough to soak up the shares being sold, the stock price will be pressured. This does not seem to be a great concern to the underwriters.
It would be fun to invest in FB, but do it carefully with an amount of money that you are comfortable with. FB is not a stock to buy now with all of your net worth, nor is any stock for that matter.