The rumormill is abuzz with chatter about Facebook's IPO, which some say could raise as much as $10 billion and value the company between $75 billion and $100 billion. Some say the company could file documents with the SEC as early as this coming week, and the rumored IPO could replace Google's as the largest internet IPO ever.
The range of interest and opinion relating to the IPO is wide-ranging. A recent Wall Street Journal article characterized the IPO as a, "Defining moment for the latest Web investing boom" , while a recent Forbes article entitled, Four Reasons Why Facebook's IPO is Irrelevant, said, "Facebook’s inability to transform the way companies operate their business means that it will remain a niche phenomenon in the grander economic scheme." The Forbes article author admits he doesn't even use Facebook, by the way.
Let's recap the company's impact so far, to put things in context. Over 800 million people have active Facebook accounts and more than half of them use the site every day. There are estimates that Facebook’s revenues grew at a 127% annual rate to about $4 billion in 2011, with operating profit of $1.5 billion". Now, to connect the dots on where they might be headed take into account that roughly 70% of active online adult social networkers shop online, and about a quarter of them say they are influenced by Facebook when it comes to their purchasing decisions. There is no wonder 2012 ad revenue is projected by some to hit $5.7 billion.
So, with all these numbers floating around, much of the conversation about the IPO is centered around the valuation. Some think the company is being grossly overvalued, if the rumors about the numbers are true. But, valuations are not as scientific as analysts may lead you to believe. At the end of the day, the valuation is only as good as the accuracy of the projections of the company's cash flow. Analysts can sit around and debate all day long about discount rates and terminal value, but at the end of the day, if they can't accurately project future cash flow their valuations are not very meaningful.This is not to say valuations are worthless, but let's just acknowledge they have their limitations. There is every possibility, and some probability, that Facebook is creating things that will generate revenue streams that aren't even being discussed yet. So, how do you value the unknown? There was a time, not so long ago, that analysts scratched their head wondering how these social media companies would turn a profit. Now, some analysts seem a bit too confident in their ability to value the company.
Social media in general has made a huge impact and Facebook is the big boy on the block. And, the significance of Facebook goes way beyond the numbers. The company has changed the way people communicate in fundamental and profound ways and it continues to do so with ongoing innovations to its site. Many companies even direct people to their Facebook pages instead of their own websites, so what does that say about how important a presence on Facebook has become. Stepping away from the financial side of things for a moment, consider the social impact Facebook has had. How many of our troops overseas protecting our country have counted on Facebook to stay up-to-date on what's going on with friends and family back home? How many of them routinely see it as a lifeline to sanity in an otherwise crazy world they have to live in each day?
It would be interesting to know which of the analysts who publicly express their opinion that Facebook's IPO will overvalue the company will take a pass on investing for themselves. Of course, many of them will have their chance to get in at a price the verge Joe on the street will never see at IPO, but that's a whole other conversation. |
