Facebook IPO, from $50 Billion to $124 Billion Valuation

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Jan 08 2011
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Facebook is the world’s largest social network, with over 500 million users. Founder Mark Zuckerberg launched “Thefacebook” (thefacebook.com) on Feb 2004 before rename it as just “Facebook” after secured the domain facebook.com in 2005 for $200,000. Facebook actually started as Facemash, a simple site that placed two photos next to each other and ask users to choose the “hotter” person – photos from which Mark Zuckerberg hacked and copied from Harvard’s private dormitory ID images. Facemash attracted 450 visitors and 22,000 photo-views in its first four hours online.

Facebook is so popular that it overtook Google as the most visited website. Facebook Inc.’s private investors range from Hong Kong billionaire Li Ka Shing (via Li Ka Shing Foundation) to Microsoft Corp and Russian’s Digital Sky Technologies. For years rumours have been circulating about the date for Facebook’s IPO. From a couple of billions the company was said to worth $50 billion and the latest crazy figure was $124 billion. And the company is set to exceed 500 shareholders threshold this year.

Facebook Mark Zuckerberg  

Now, things are getting interesting. As much as Mark Zuckerberg would like to keep his company private (he still is?), the company may be forced to disclose its financial results publicly once the 500 shareholders threshold is breached, at least according to Securities and Exchange Commission’s Section 12(g) Act requirement. Goldman Sachs is busy pitching Facebook’s $1.5 billion of investment to its super-rich clients. And Goldman Sachs’s trick to go around the 500 shareholders threshold – create a single special purpose vehicle but the trick won’t work as far as the S.E.C.’s definition of record of ownership is concerned.

Although an initial public offering is not mandatory, Facebook would begin “reporting” to S.E.C. within 120 days of the last day of its fiscal year it exceeded the 500 shareholders limit which means Facebook must start filing quarterly and annual reports with the S.E.C. Google decided to go IPO several years ago when it faced with similar situation hence the rumours about Facebook would probably choose the same path (going public) in 2012.

Time Spend Facebook Google Yahoo 

Regardless whether Facebook will go public or not, the company’s financial details will be known to public by end of April 2012 simply because Facebook has announced that it will exceed 500 shareholders this year regardless of whether Goldman’s clients are treated as a single shareholder or as many shareholders. If Facebook eventually goes public the clear winner is indeed Goldman Sachs as the IPO would generates 4% – 7% in fees from the total offering.

Some financial details about Facebook has leaked out – Facebook’s revenue for 2009 is $777 million with a mind-boggling $200 million in profit while 2010’s revenue was $2 billion and $500 million in profit. So does Facebook worth $50 billion as valued by Goldman Sachs and Russian investor Digital Sky Technologies (DST)? Goldman and DST know Facebook’s financial details and may have over-excited about Facebook being another Google in the making.

And that’s precisely the selling story orchestrated by the Goldman and DST – Facebook will grow like Google five years ago. Furthermore of the three biggest websites (Facebook, Google and Yahoo), Facebook is the fastest growing and people spend more time on Facebook than any other site. Using Google as the comparison – Google had $2 billion revenue about 1-year before it went public and now it has market capitalization of about $200 million. Assuming Facebook goes public in a year (2012), it’s exactly right where Google was, but with faster growth story.

Facebook $50billion Valuation 

Of course one can argues that at $50 billion, Facebook’s valuation is about 25 times its 2010 revenue and that’s expensive because it’s almost triple Google’s price-to-sales ratio of 9. Maybe Facebook is worth only $7.14 billion, a fair value of 7 times its 2010 revenue because the company may not be able to double its sales year-on-year as what Google has done so throughout most of the 2000s.

But wait, if you think $50 billion is expensive and too risky, there’s an investor who agreed to buy Facebook stock at $55 a share valued the company at a whopping $124 billion or a multiple of 62 times the company’s 2010’s $2 billion revenue. However this crazy investor is only buying in thousands of dollars in an auction so you may want to avoid being too paranoid about missing the train.

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I’m looking forward to catching some upside on the post-IPO hype, but I can’t believe a $50B valuation. 25x revenues? Looks like GS is pumping this one to inflate the fees. 6-7% of $50B compared to $10B (what it’s really worth). I’m no short here, that would be ridiculous given the amount of attention this issue is already receiving. Nonetheless, I’m no buyer in the mid to long-term.

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