IPOs, Initial Public Offerings: pre & post IPO

Facebook IPO notes

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S-1 Observations & comments expected to be posted shortly after S-1 is filed.

Tuesday:  January 31
We expect Facebook to file its S-1 with the SEC Wednesday am to raise $5 billion at a market cap of $80 billion, if it puts in a price range.   We’ll be looking carefully at sequential growth in various metrics.  Stay tuned for updates…

SUMMARY
It seems that Facebook is banking on its overly enthusiastic user base to provide the initial demand for its upcoming $10 billion IPO.  But ultimately it will come down to ‘compare & contrast’ ratio analysis versus other social networking stocks.

Yes, Facebook is the biggest social networking company etc etc., and reportedly has the best after-tax margins, but the valuation key is sequential growth metrics – are they accelerating or de-accelerating?  Those metrics will eventually set the valuation, it seems to me.

Last May Facebook had 750 million users, in November the estimate was around 800 million so user growth apparently plateaued, perhaps because users are ‘churning’ out of Facebook based on Facebook fatigue.

TIMING – AN IPO LAST YEAR WOULD HAVE BEEN BETTER FOR FACEBOOK
In 2011 Linkedin and about 10 social media companies IPO’d.  They all hit their all time peak within the first hour, a peak never to be seen again.  Therefore, a number of investors have a bad taste in their mouths because only the traders have made money (if that) in the social media IPO after market.

If Facebook had IPO’d last summer then there would have been less ‘instant’ heat’ on them and they would have had been better able to defend their growth plans.

Now, they are going to file the S-1 with the SEC and they will be in a quiet period, and will have to sit on the sidelines while the investment community chatters about Facebook’s valuation.

The proof is in the current estimated valuation, $75 billion to $100 billion.  If Facebook itself had ‘opened up’ the social media sector last summer, it may have had a better chance to hold up its valuation.

As a result of waiting, I think now Facebook is going to get worked over and end up being ‘damaged goods’ in the eyes of investors who do the ‘compare & contrast’ work

REVENUE ESTIMATES
Revenue estimates – Facebook valuation estimates are between $75 and $100 billion.

But 2011 revenue estimated have been trending down. Revenue estimates in the September time frame were in the $4.3 bb range, than dropped to $4bb and now there are some reports that 2011 will be reported as $3.8 bb.

If true, that shows that Facebook cannot forecast accurately, which should bring into question the accuracy of reports that 2012 revenue will be up 60%.

And beyond 18 months Facebook’s top line revenue growth is hazy at best.

EARNINGS
The current estimates reports are that Facebook had $1.5 billion in operating earnings for 2011, and perhaps $1 bb in after tax earnings.

If it’s $1bb in after-tax earnings then the trailing 12 months price-earnings multiple would be 75 to 100.  Facebook needs more top line revenue growth visibility than it currently had to justify such a high multiple.

USER BASE GROWTH DE-ACCELERATING
Last May Facebook had 750 billion users, in November the estimate was around 800 billion so user growth apparently plateaued, perhaps because users are ‘churning’ out of Facebook based on Facebook fatigue.

The world’s population is around 6 billion, after subtracting China’s 1.5 billion or so because Facebook is locked out of China.

Maybe Facebook can get to 1 billion users, but than what?  That’s one out of six on the planet.  I don’t believe then can continue to show significant sequential quarterly growth in revenue beyond the next 18 months or so.

REVENUE GROWTH PLAN
Without user growth Facebook is going to have to seriously ‘monetize’ its user based through advertising.

That’s why Facebook is attempting to be the ‘go to’ company for internet-based advertising based on user demographics to help advertisers target specific market segments.

AD-CLUTTERED PAGES
However, Facebook’s pages are already cluttered with ads.  I understand the click-through rate is only 25% that of Google’s click through rate, so Facebook has a lot of catching up to do in order to increase revenue beyond 12 to 18 months.

Although Facebook may get a short term revenue boost in 2012 from their Spotify relationship.

FACEBOOK FATIGUE
It’s hard for me to see the user based going much higher than one billion worldwide, because Facebook’s users are already starting to churn out of the Facebook system, based on Facebook fatigue.

TIMELINE TRANSITION
The other problem I see is in the forced user transition to ‘timeline’, even though the transition is ‘automatic’ and easy to learn if you put in a little effort. T
Forcing users into a slighlty different system at such a critical IPO time could be a risky strategy, especially because the benefits to ‘timeline’ are not clear.

MARK ZUCKERBERG, CEO
He faces a credibility challenge regarding whether he is capable of being CEO of a large, rapidly changing company at 27 years of age.  So he is trying to bring in senior management talent to sell their credentials to the investment community.

The outcome, of course, remains to be seen but it is clearly a risk for investors.

IS FACEBOOK A TECHNOLOGY COMPANY
like Google, Apple, Amazon, Etc?

Google & Apple both have internally developed technology, as in ‘what’s new with Google & Apple?’  The same question somehow rings hollow for me regarding Facebook — ‘what’s new with Facebook’ may be answered over time with ‘who cares.’

Amazon really keeps up with trends and for me at least, when I want to buy something I’d rather go to Amazon than drive to a bricks & mortar store.

I don’t believe Facebook is a technology company in the same class as Google, Apple & Amazon.

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