Seven years after its founding, Facebook and its original backers are selling to the public about 15 percent of the company's stake, or 337.4 million shares out of total outstanding shares of 2.137 billion, according to Bloomberg News. Out of the 337.4 million IPO shares, only 180 million shares are newly issued by the company and the other 157.4 million shares are being sold by existing owners including CEO Mark Zuckerberg, the single largest shareholder with close to 25 percent of the controlling interest, and venture capital firm Accel Partners. The IPO price is set to be $35 at the high end. At that price and with 2.137 billion shares outstanding, the Facebook IPO values the company at $74.8 billion, just a bit shy of half of the current market valuation of about $198 billion for Google (NASDAQ: GOOG). But remember, Google has sales revenue of more than 10 times that of Facebook. The Facebook IPO may have come at a hefty price tag for public investors.
Facebook had revenue of $3.711 billion, or $1.74 per share, for the year ended in December 31, 2011, based on financial statement data contained in the company's Form S-1 Registration Statement filed with the SEC. This compares to Google's revenue of $37.905 billion, or $116.63 per share, for the same period. At the potential IPO price of $35, the Facebook IPO is demanding a price-to-sales ratio of more than 20, while Google commands a price-to-sales ratio of only about 5. Another highly valued company Apple (NASDAQ: AAPL) also trades at about 5 times its sales revenue. It is true that Facebook has seen its revenue about doubling for each of the past five years. But given that its sales currently rely solely on online ads, if the sales slows without newfound help from other sources, the stock price may have to come down to adjust for a more reasonable price-to-sales ratio.
In terms of equity book value, the Facebook IPO price at the high end also appears to be an overstretch in valuation. Facebook reported total shareholders' equity of $4.899 billion as of 12/31/2011. This equals $2.50 per share for the company's original owners, caculated as $4.899 billion/(2.137-0.180) billion shares to exclude the issuance of additional 180 million shares to the public. According to a Bloomberg report, existing shareholders paid an average of $1.10 a share for Facebook. This means that over the yeas, early investors have seen their share value increasing to $2.50 per share from their original contribution of $1.1 per share on a book-vlaue basis. Now through the IPO, current company owners are able to value their shares at $35, amounting to a 14-fold increase in valuation. What this in turn means for new investors is that they are investing in each share worth of $2.50 in equity book value for $35 at a price-to-book ratio of 14. Many investors would consider this as a sign of over-valuation.
IPO proceeds from the new issuance of 180 million shares will certainly add to the company's total book value. At $35 per share, capital contributions from new shareholders will increase the pre-IPO book value of $2.50 per share to about $5.25 per share post IPO, caculated as [$4.899 billion + ($35 x 0.180 billion shares)]/2.137 billion shares. Thus, in post-IPO trading, at the $35 price level, Facebook stock would be trading at a price-to-book ratio of around 7, which is about the same level of P/B ratio for Apple. But Apple had over $100 billion in sales revenue for the latest year, compared with Facebook's mere $3.7 billion. Google, on the other hand, has a P/B ratio of only 3.4, but its sales revenue is also higher than Facebook's.
Facebook's IPO valuation may seem even more alarming when judging by the P/E ratio. Facebook reported $0.52 per share of net income in its SEC registration statement. At $35, Facebook stock would be trading at a P/E ratio of close to 70. Meanwhile, both Google and Apple have a P/E ratio of about 18 and 14 respectively.
So where is Facebook's face value and are investors paying for what the company is actually worth? It seems that all the valuation metrics have shown only a premium, or over-valuation, to the company's face value. Post-IPO trading could be under quite some pressure if the market fails to justify such a high premium.
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