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Check out our post on “How to Play the Facebook IPO”
The Facebook IPO
Facebook is going public, and there has been a lot of talk about when the IPO will take place given that Zynga’s less than optimal market performance since it decided to float. From the blogosphere it seems, and here at the Economic Times, it looks like the Facebook IPO will likely happen in Q2 of 2012 at the earliest, but what can you do in the meantime before that date.
How to Buy Now
The easiest way to buy into Facebook right now is through Sharespost.com which has had at least two oversubscribed auctions at a reserve price of around $34 a share with a minimun lot size of $100,000 or around 3300 shares throughout december while everyone has been getting lazy through the holiday season (only 125 million shares were traded today). This values the company at $80,019,000,000. Which yields leaves at least 20% upside for estimated $100B IPO with an offering of around 10% of the company. Rumor has it that they will probably float 10 billion or less, which is going to be an extremely small float, which will probably cause a supply and demand asymmetry with a temporary spike and then the shares would settle down .
Valuation
As we all know Value is a very nebulous thing
Take a look at the Bloomberg interview with venture capitalist Hussein Kanji as he walks through how to value Facebook. Hussein points out that the two best comps to peg Facebook are Amazon and Google‘s AdSense Business (ads on third party sites).
We know for sure that in first 6 months of 2011 Facebook did 1.6b in revenue and In the interview with Kanji on 11/29 it was rumored that Facebook would pull around 4.3b in Revenue for the year. Assuming that Facebook is in primarily a 50% margin business and able to keep about more of each dollar than Amazon with the market currently pegs amzn at around 94 times earnings… Facebook could be worth well over 100 billion dollars…like maybe 156 billion…check it…
Since the 11/29 interview, Business Insider reported that Facebook’s 3rd quarter was underwhelming with the company bringing in a mere 900 mil in the quarter for a total of 2.5 billion this year leaving the 4th quarter with the trouble to bring in at least 1.5 billion to top estimates and reach the 4 billion mark which would be about double the $830 million Facebook has been bringing in quarter over quarter. But even if Facebook “underwhelms” and only brings in 830mil in q4 leaving revenues culminating in $3.33 Billion Revenue total at 50% margins with Amzn’s P/e of 94 you get 156.51 Billion dollar valuation…whoa… Too good to be true?
The other comp to look at is Google Ad Sense on 3rd party pages and take to look at Google’s AdSense(a similar business model to Facebook)’s contribution to its market cap . We know that Adsense will bring in around $9.56 billion dollars this year in 2011 out of Google’s estimated 36.82B with 11.892B in earnings we can say that and google keeps about 32%-49% of this revenue as earnings from adsense and therefore safely assume that the earnings power of adsense is not significantly higher than the other segments of the business and can therefore be appropriately pegged 21x P/E earnings . So take the 1.665 of Facebooks earnings and multiply it out and you get the significantly smaller value of $34.95B which just does not seem possible at this point… but Hussein Kanji says that you can get $60-75B if you blend in Yahoo advertising and assume that Facebooks user value is higher… with private markets already valuing facebook well above $80B… we can probably just assume that google is cheap…
Although it may be fun to play the supply and demand pop from private shares into the IPO, it is interesting to think about buying Facebook for the long haul on a five year or even 10 year horizon. Lets assume that Facebook turns into the next Apple and becomes the most valuable publicly traded company by market cap and reaches a value of $370 billion or just for fun $400 billion dollars (lets add a little inflation, because it looks like price levels around the world can only go up right?) even if Facebook is able to that over 5 years its only 30%(or 32% respectively) yoy return (over ten years thats only 14%). Emerging market stocks are cheap, Oil could pop this summer on supply concerns, and Sugar got hit hard etc. surely there are other trades that might be better.
Conclusion
Buy now in private markets ride the IPO sell it on opening the day, and in 6monts to a year after the IPO in April if valuations hold pull a like kind from AAPl or GOOG when you feel either one has become an IBM or Intel and Facebook becomes the new hedgefund and institutional tech growth darling.
Holla