In the summer of 2004, George W. Bush and Senator John Kerry
were locked in battle, seeking votes for the upcoming Presidential
election. Another major event was making the headlines that summer
was preparing to launch the most important
of the decade, eventually choosing to price its
at $100 each when the stock debuted in mid-August. The stock would
hit $200 by the following spring, $300 by the end of summer, and
$400 by that autumn, a little more than a year after the IPO took
Fast-forward to next week, and we'll be talking about the largest
IPO of this decade: Facebook.
Facebook's IPO is scheduled for May 18, and based on preliminary
pricing, will be valued just shy of $100 billion. That's nearly
three times the value assigned to Google when it went public (and
roughly half of what Google is worth today).
Should investors expect a sharp 300%, 15-month gain for Facebook,
as was the case with Google? No way. That would value Facebook at
nearly $400 billion, almost up to Apple's $530 billion valuation.
And Apple is vastly more profitable now than Facebook will likely
be five years hence.
Still, depending on where the stock opens, investors may still see
solid upside -- at least according to a pair of analysts that have
already come up with post-IPO price targets. Sterne Agee's Arvind
Bhatia (who correctly predicted the sharp eventual pullback for
before that IPO started trading) thinks shares of Facebook will
settle in at $46. That's nicely higher than the expected pricing
range of $28 to $35 a share. Wedbush Morgan's Michael Pachter
thinks shares are worth $44. These analysts agree Facebook may be
valued at close to $150 billion by the time the IPO dust settles.
This firm thinks Facebook will irrevocably alter the online
, just as Google did. The key factor: Facebook's 900 million
monthly users, half of which log on daily. That kind of reach
should enable Facebook to garner a growing slice of a growing pie.
The online ad market is currently around $68 billion, but should
reach $120 billion by 2015 -- a 13% annual growth rate. Facebook
already garners 5% of all online ad revenue, and that figure could
rise to 8% by 2015.
Sterne Agee's boldest prediction: "We think FB can more than triple
its revenue and
over the next 4 to 5 years." The social-networking giant had $3.7
billion in revenue in 2011, and that figure should top $5 billion
this year. (If you're keeping score, Facebook's
price equates to nearly 20 times projected 2012 sales, and these
analysts' price targets imply a move up to 30 times projected 2012
sales. That's rich.)
How can they justify such a large price/sales target multiple?
Because Facebook makes a solid
on every dollar of sales. The company had 62% EBITDA margins in
2011, though that figure should slip to 58% this year. Indeed,
Facebook's profit levels fell sequentially in the first quarter,
which would have hurt the prospects of a lesser IPO. For now, the
company is getting the benefit of the doubt that rising revenue
scale economies -- and stable-to-rising margins.
Yet investors will need to simply ignore any near-term valuation
measurements for this stock. After earning $0.43 a share in 2011,
Sterrne Agee predicts
per share) will rise to $0.56 this year and $0.69 in 2013. So their
implies a P/E of 67 times projected 2013 profits. Make no mistake,
Google's solid post-IPO performance was based on the fact that
profits were able to keep growing at a very fast pace, and Facebook
will eventually be judged by that metric as well. You can only be a
"story stock" for so long.
This firm's argument for a nice post-IPO spike is very similar to
Sterne Agee's take: Rising
in online advertising should help deliver sustained growth. The key
twist: Facebook is also set to rake in ample profits by getting a
hefty (30%?) cut of online-gaming revenue from partners like Zynga.
They note that "sale of virtual goods on social networking sites,
online worlds and casual games is expected to grow to $14 billion
by 2016, up from $9 billion in 2011."
Wedbush Morgan's Pachter sees EPS hitting $2 by 2015, and figures
shares will trade for 22 times that number -- or $44. Yet he also
acknowledges that demand for "Facebook shares will likely outstrip
supply," meaning shares will likely trade much higher than the
offering price, regardless of metrics like EPS.
For my part, I'm intrigued to think about what Facebook will do
with the roughly $5 billion to $6 billion in cash it will get from
the IPO. Will Facebook step up its development efforts, launching
the company into new ancillary businesses that feed off of the
social media model? Will the money be used to buy up any hot
technology firms that sprout in
or elsewhere? Mark Zuckerberg likely already has plans formulated
in his mind.
Risks to Consider:
Risk of a poorly-received IPO? None. Risk that shares will
eventually soar so high that late-to-the-game investors will be
burned? Quite possible.
Action to Take -->
Shares could see such scorching demand that they open even higher
than these price targets, and few will be shocked to see this stock
at $60 or $70 in a few weeks. These mid-$40s price targets are
instructive, because if shares indeed move well above any sort of
fundamental justification, then you should grow much more cautious
and look to take profits if you already own shares. Unlike Google,
which was priced in a more reasonable fashion, this IPO will be
expensive to start with and only get more expensive from there.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority owns shares
of GOOG in one or more if its real-money or investment
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