by Jason Jenkins, Investment U Research
Monday, February 13, 2012
Unless you’ve been living under a rock for the last few months, you know that Facebook has filed its initial paperwork with regulators for its initial public offering (IPO). And they’ve hired five underwriters for the job, with Morgan Stanley (NYSE: MS) taking the lead role.
These Numbers Make No Sense…
Facebook generated $3.7 billion in revenue in 2011, and a nice $1 billion in net income. For those of us who truly value fundamentals: If Facebook goes public and hits its high end with a $100-billion market cap – that means it would have a P/E of 100 times trailing earnings.
Forbes took a look at what that number means and the rarified air that type of market cap puts you above. Look at the following companies and tell me Facebook should be worth more:
- Boeing (NYSE: BA) – $57-billion market cap, $69 billion in revenue, $4 billion in profits.
- Disney (NYSE: DIS) – $76- billion market cap, fiscal year September 2011 revenue of $40.9 billion and $4.8 billion in profits.
- Hewlett-Packard (NYSE: HPQ) – $58-billion market cap, fiscal year October 2011 revenue of $127.2 billion, non-GAAP net income of $10.4 billion.
How Would You Make Money?
Your Mom is on Facebook. Your spouse is on Facebook. Your kid is on Facebook. To state the obvious, almost everyone is on Facebook. The company’s numbers say they have 845 million users each month and 483 million active each day. However, if you got in early, you should be worried whether the company can grow beyond this activity.
Could you double your money? There are less than 20 companies with a valuation that high. At $200 billion, the company would shoot past AT&T (NYSE: T), Procter & Gamble (NYSE: PG) and Johnson & Johnson (NYSE: JNJ), and roughly be on par with General Electric (NYSE: GE), Google (Nasdaq: GOOG), or Berkshire Hathaway (NYSE: BRK-A).
The Risk Involved
Remember that any slip-up after this IPO valuation will cause a decrease in value. And their S1 actually makes points of what could cause this hiccup.
Here are a few points that they brought to light that could hurt or slow growth in the future:
- If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results and business may be significantly harmed.
- We generate a substantial majority of our revenue from advertising. The loss of advertisers, or reduction in spending by advertisers with Facebook, could seriously harm our business.
- Our business is highly competitive and competition presents an ongoing threat to the success of our business.
- Improper access to or disclosure of our users’ information could harm our reputation and adversely affect our business.
- Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could harm our business.
So let’s not look at this initial public offering as the cool new platform that all of our family friends use that will be around forever. View the Facebook IPO by the numbers, and the pros and cons that could happen after this initial market capitalization. It can still grow and evolve and be successful. But if its success isn’t over-the-top, you’re going to lose money if you get in early.