The highly anticipated Facebook IPO has everyone on the edge of their seats. Except me. They just decided to increase their IPO price to increase the supposed value of the company to somewhere between $80B and $100B. Here are some numbers I found from various sources. The only logical conclusion I can draw from these is that no one really knows what’s going on, and the Executives at the company in question must have a very good poker face:
In 2010, they made $500M. Or maybe $600M. And this was on revenues of $1.6B. So we’re looking at an operating margin of between 31% and 38%. Not bad.
The “projection” for earnings for 2011 was $2B on $4B in revenue. That was recently revised to $1.2B in REVENUE. Yes, you read that correctly. Their revenue = 60% of their expected earnings? That sounds like a company falling off a cliff.
For the sake of analysis, let’s go with some friendly estimates:
40% operating margin. Let’s assume the company became even more efficient than their previously highest estimate.
$1.3B. We’ll assume the estimate was close, and throw in a little buffer.
1.3B X 40% = $520M. This is about the same if not lower than the previous year’s earnings. And this is with very conservative estimates, which means it’s probably down.
Let’s go with $500M in earnings, for ease of math. For a company worth, on the low end, $80B @ $35 a share at the IPO, they’d be floating approximately 2.3 billion shares. This brings EPS to about 22 cents, and a nice low and comfy P/E ratio of 159.
WHAT? Did I read that correctly? Yes, you did. As a frame of reference, a P/E ratio of somewhere between 10 and 25 is usually a good range to consider purchasing a stock. There’s also a few other variables, which are not empirical, but rather editorial. Regardless, they’re still worthy of a mention:
1) Anyone who wants to be on Facebook is probably already on there. I found I am on there a lot less than I used to be. I believe I’m suffering from “Facebook Fatigue”, and I’m probably not alone. I would assume at this point the rate of fall-off will exceed the rate of new users, hence reducing the user base and revenue potential.
2) They generate very little from advertisements on mobile devices, which are now surpassing PCs and Macs as the primary electronic communication devices. If they start blasting people with advertisements on a 4-inch screen, people will exodus faster than drunk underage kids at a busted party.
3) There is really no barrier to entry. Look at MySpace. It went from great to gruel in a matter of days after Facebook took off. There is nothing to stop “the next great social media site” other than the fact that it hasn’t been built yet. Not if, but when, that occurs, Facebook’s stock will plummet so fast there will be no buyers for the newly-minted penny stock.
4) Impending privacy lawsuits and/or hacking. I foresee a whole bunch of these if they don’t get their act together. As a public company they have to follow a completely different set of rules and are more accountable than a private company. Even a small slip-up can cause major damage, and they’ve already had quite a few. I’ve never seen a class action lawsuit involving hundreds of millions of people, but there’s a first time for everything.
In conclusion, a more reasonable offering price for this company should be in the $10 range, and that’s assuming you don’t believe it’s past its peak. One last question for you. If your $5 latte at Starbucks all of a sudden cost you $18, would you push people out of the way to buy a dozen of them?
There are some serious problems with the logical circuits of people in this country. My advice – if you’re planning on buying Facebook stock at or shortly after their IPO, see a psychiatrist first to make sure your brain is functioning correctly.