Facebook’s $5 Billion IPO.




On 1 February 2012 Facebook Inc. filed an S-1 form with the Securities and Exchange Commission confirming one of the world’s most widely anticipated Initial Public Offerings (“IPO”) and the most significant event in Facebook’s history since Harvard sent its acceptance letter to a certain Mr Mark Zuckerberg. If all goes according to plan the social media giant seeks to raise $5 billion in initial funding and would begin trading its stock on either the NYSE or Nasdaq by May 2012.

This would be the largest internet or technology IPO globally ever. As a point of comparison, a $5 billion Facebook IPO would be over 3.5 times as large as Google’s $1.4 billion IPO in 2004.  Apple made less than $100 million from their IPO in 1980 (or what Apple makes today in approximately eight hours of revenue!).

With 23 Internet and social media related IPOs in 2011 at an average return of -18%, investors and analysts are losing confidence in the value – and huge valuations – attached to these companies with negative earnings and questionable revenue potential. So with the market sentiment toward the sector as a whole somewhat chilled, will Facebook be able to stimulate investor appetite and interest with their IPO?


The market had mixed reactions to the internet and social media IPOs in 2011. The first half of the year was all sunshine with a more muted reception in 2011 H2. When LinkedIn (Facebook for business people and professionals) announced its IPO, it seemed that the markets saw a great deal of potential in professional networking as a business – LinkedIn share price on its first day of trading opened at $83, hit a high of $122.70 and closed at $94.25. It was suggested in an analogy that if LinkedIn is the bread you receive before a meal in a restaurant, then Facebook is the starter, the main course, the dessert and the after dinner drinks at the same restaurant.

On the other end of the spectrum, Zynga (free online gaming company) in its December IPO opened at $11 and closed at $9.50 which was even below its IPO price of $10 per share. Zynga currently earns 94% of its revenue from Facebook users, with 30% of these proceeds making their way back into the coffers of Facebook. If anything these 2 companies are complimentary, the one’s success fortifies the other.

The outcome of these two IPOs confirms the volatility of this sector, however this does not give any indication on how Facebook will be received by the market. The ability of these companies to generate revenues and profits is evident by the past performances, however Facebook has been exceptional in their performance as can be seen below in the numbers made public with their IPO prospectus.


  • 2011 Revenue: – $3.70 billion
  • 2011 Operating Income:  - $1.75 billion
  • 2011 Net Income: – $1.00 billion
  • Net Income Margin: – 27%
  • 2011 R&D Spending: – $388 million
  • 2011 Cash and cash equivalents: – $3.91 billion
  • No of Employees: – 3,100
  • Monthly active users: – 845 million (December 2011)
  • Daily active users: – 483 million (December 2011)
  • Facebook users on mobile devices: – 425 million (December 2011)
  • Number of languages available: – 70
  • Likes and comments per day: – 2.7 billion
  • Photos uploaded per day: – 250 million
  • Average daily user time on Facebook: – 32 minutes
  • Average number of friends per user: – 131
  • Total number of Facebook friendships: – 100 billion
  • Price/Earnings Ratio: – 75x (assuming a conservative valuation of $75 billion)
  • Revenue Multiple: - 20x (assuming a conservative valuation of $75 billion)
  • Free cash flow 2011: – $555 million
  • Market share: – +/- 3% of the global online advertising market


Article source: http://deloitteblog.co.za.www102.cpt1.host-h.net/

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