Facebook IPO: Everything You Need To Know For Friday

Michael Convente May 17, 2012 2
Facebook IPO: Everything You Need To Know For Friday

After several months of rumors, updates, and commentary, tomorrow will be the official launch date for Facebook’s well-anticipated IPO.  We at pnosker.com have been covering the Facebook IPO for the last few months, and we wanted to give our readers a recap of all the news surrounding tomorrow’s IPO launch, especially considering that some details have changed quite a bit.  As a quick bit of information before getting into the recap, Facebook plans to list on the NASDAQ under the ticker symbol “FB”.

The First Word:

It was first reported at the end of November 2011 that Facebook was planning to file an IPO.  Facebook’s target launch date was said to be sometime in the Spring of 2012 (which turned out to be correct), and they were hoping to raise $10 billion, which would value the company at a staggering $100 billion.  The $100 billion valuation number would make waves across the media for the next several months, as that high a valuation would make the company worth more than well-established companies including Hewlett-Packard, Cisco Systems, and Ford Motor Company.  Recent reports have suggested that the market value of Facebook could reach even higher, potentially as high as $160 billion (more on that later).

S-1 Document Filed:

Facebook officially filed its S-1 document with the Security and Exchange Commission on February 1, 2012.  The document revealed Facebook’s enormous user and revenue growth, and most importantly for investors, that the company has been profitable since 2009 and that profits have grown 5-fold since then.  The S-1 document also revealed a shift of revenue source for Facebook.  In 2010, 99% of Facebook’s revenue was from advertising, however for the last three months in 2011, 17% of Facebook’s revenue is identified as “payments and other fees”.  Most of this revenue is royalties collected from Facebook’s Payments virtual currency platform, which is purchased by consumers who play one of countless games available on Facebook, the most notable ones coming from Zynga.

Q1 2012 Financials Released:

Just a few weeks ago, Facebook revealed its Q1 2012 earnings report showing a further increase in users and revenue, but a decrease in profits.  Total users for Facebook now total over 900 million, and this growth in membership lead to an increase in quarterly revenue to $1.06 billion.  However, despite the increase in users and revenue, quarterly profits were down 12% compared to Q1 2011 ($205 million vs. $233 million), which if extrapolated across all of 2012, would result in a yearly profit of $820 million, $180 million less than the $1 billion in profits Facebook earned for all of 2011.  $820 million in profits is still a remarkable haul for the still relatively new company, but Wall Street demands profit growth every single quarter, so this moderate decrease in profits might cause some concern if the trend continues for the rest of the year.

The Home Stretch:

Facebook has generated a significant amount of media coverage the last two weeks leading into tomorrow’s IPO launch date.  The response from investors has been so strong that Facebook has upped the amount of shares it plans to offer, as well as the initial share price.  Facebook now plans to offer 421 million shares, up 25% from its early offer of 337 million shares.  The initial share price has also increased, now ranging from $34 to $38 per share.  If all 421 million shares are sold at a price of $38, Facebook’s market value would total $160 billion, $60 billion more than the initial $100 valuation initially reported.  The company would raise upwards of $16 billion in capital, $6 billion more than originally planned.  If the share price pops on the open, Facebook’s market value could move well past $200 billion, which would make it one of the most valuable companies in the world.

Silicon Valley is preparing for thousands of employees to become instant millionaires.  Real estate agents have been salivating at the prospects of new millionaires purchasing bigger and more expensive homes in the region, which would also lead to overall property value increases.  The state of California is also expected to receive a financial windfall from all the new Facebook millionaires as they cash in their shares (and pay their taxes).  Projections ranged from $1.6 to $2.1 billion in tax revenue, and with the state facing a budget deficit upwards of $16 billion, any extra money the state can get their hands on will be welcomed in Sacramento.

Of course, some early investors in Facebook are going to see their net worth increase not by millions, but by billions.  Facebook founder and CEO Mark Zuckerberg will see his net worth increase by as much as $28 billion, and other early investors, such as PayPal founder Peter Thiel, will net approximately $2.5 billion.  My favorite Facebook multimillionaire is artist David Choe, who received early Facebook stock as payment for painting murals at the company’s headquarters.  His shares are estimated to be valued between $200 and $500 million.

Among The Boom, Still Some Doubters:

A lot of investors are seeing Facebook as the next Google, with some hoping for a return to the dotcom boom era of the late 1990s.  However, at least one major advertiser is questioning whether spending ad dollars on Facebook leads to a solid return on investment.  General Motors generated quite a buzz on Tuesday when they announced that they would be pulling all of their advertising buys from Facebook.  GM’s advertising buy on Facebook totaled $10 million, an amount that while not trivial, still probably hurts less than the storm of negative media the company received from this unexpected announcement.  GM stated that it was questioning whether social media can actually make an impact on potential customers.

I think GM’s negative experience with social media has more to do with two demographic trends than an overall indictment on social media.  One, social media is dominated by the Millennial generation.  Two, Millennials aren’t buying nearly as many cars as their predecessor Gen-X, Gen-Y, and Baby Boomer generations – mostly because of their concern for climate change and their overwhelming preference to live in urban areas, which often eliminates the need for owning a personal vehicle.  Overall, I think social media (Facebook included) is a positive medium for reaching customers, and I expect Facebook’s revenue to continue to grow.

Final Thoughts:

Facebook’s IPO journey has been quite intriguing to follow during the last several months.  While many people still hate on Facebook (ironically posted by said haters on Yahoo Message Boards), I predict that Facebook will continue to dominate social media and the overall interactive Web 2.0 for years to come.  You are not going to see another MySpace debacle with Facebook.  If that were the case, it would have happened by now (remember, MySpace went from top of the world to irrelevant in only three years).  Facebook successfully defeated MySpace and even Google in the social media wars.  I think they’re going to be just fine.



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