What You Must Know About the Facebook IPO

Michael Brush MSN Money February 8, 2012

2/7/2012 6:54 PM ET

By Michael Brush, MSN Money

The social-networking giant will hit the market at a high price -- perhaps too high. Here's a look what you should pay, the risks and the biggest wild card.

Given the media blitz on Facebook's plans for an IPO, by now it seems we've learned everything about the company except what CEO Mark Zuckerberg eats for breakfast.

Maybe one of the TV tabloid shows will fill us in on that soon.

Meanwhile, what I really want to know are the answers to the following key questions: Will the company be overvalued? Does Facebook have a future, or will the IPO mark its top? How much will shares cost me? What are the real risks?

And based on all that, should I buy the darn stock?

I recently talked with a half dozen or so tech and media experts, including a few who already own the stock via the private market, and I came away with the following key takeaways. Call it a field guide to the Facebook IPO.

According to numbers leaked to the media by Facebook IPO insiders, the social-media site will come public with a market cap of $75 billion to $100 billion. Given the trailing annual revenue of $3.7 billion and trailing earnings of $1 billion, the company will have a price-to-earnings ratio of 75 to 100, and a price-to-sales ratio of 20 to 27.

Latest news on the Facebook IPO

Those seem like crazy numbers, compared with price-to-earnings and price-to-sales ratios of 20 and 5 for Google (GOOG, news)and 13 and 3.3 for Apple (AAPL, news). But they really aren't too high if you, like many investment pros, believe this is a game-changing company in the early stages of its growth.

"It doesn't sound too ridiculous," says Michael Scanlon, a tech analyst with the John Hancock Balanced A (SVBAX) fund. He points out that Google carried what seemed like a crazy price-to-sales ratio of 23 when it came public, and the stock has done incredibly well since.

Michael Brush

"Facebook is still in its infancy. Social-media spending is a fairly new initiative for Fortune 500 companies, so it will take a while for them to figure it out," he says. Advertisers had the same attitude toward the Internet a decade ago. But online ad spending is set to surpass offline ad spending for the first time this year.

"This kind of offering is a battle between people who argue it is insanely expensive and people who look at the huge footprint the company has and how they have only scratched the surface of monetizing that," agrees Kevin Landis, portfolio manager of Firsthand Technology Value (SVVC) fund, which has more than 5% of its assets in Facebook, the fund's largest position. "It is almost not worth arguing what the right multiple is. If they fully take advantage of their possibilities, they could be worth more than Google."

Hmmm. Valuation doesn't matter? Didn't we hear that during the tech bubble about a lot of companies that didn't survive?

Yes. But some of the companies from that era were game-changers worth paying a little extra for -- think Amazon.com (AMZN, news) and Google. Which brings me to the next key takeaway:

Takeaway No. 2: Facebook is a real game-changer

In the run-up to Facebook, a string of social-networking stocks went public last year. And investors who bought their IPOs have generally lost money. (Read "The year of the broken IPO.") So why pay a bundle for this one?

Because Facebook is "just another social-networking stock" the way Google was "just another search engine." It's the company that defines how to make money in the sector.

"Facebook, to me, looks dominant," says veteran investor Tom Vandeventer, portfolio manager of the Tocqueville Opportunity (TOPPX)fund, which has about 2% of its portfolio in Facebook. "This company has one of the most compelling business models that I've seen in 30 years. It has the ability to really take a lot of market share in advertising."

As evidence, Vandeventer cites some of the stats that Facebook released in its IPO filings. A key one: Facebook numbers on what it calls "engagement." Users post 2.7 billion "likes" and comments a day, or five or six comments per user, per day, for the most-active user base of about 500 million. (Total membership is 845 million.)

"It is not a pass-through site. That makes Facebook very competitive. That is what people underestimate here," says Vandeventer. This helps give Facebook the all-important defensive moat that investors look for. "I don't see the entrenched Facebook user base going anywhere. They're not going to leave their friends and friend circles."

While you're on Facebook, of course, it is gathering tons of intensely personal information about you, which it can then use to target ads -- something that no other site can do as well. "When Google tries to take advantage of this, it feels kind of creepy," says Landis. "When Facebook does it, it's much harder to complain because you gave it up. You posted all that stuff."

Continued: 3 key surprisesSingle page123Next >RELATED ARTICLESFacebook flaw that could be fatal- MSN MoneyFor Facebook, exchange choice is a matter of image: Associated ...Get ready for more Facebook changes- MSN MoneyIs Facebook the New Google?: TheStreet.com Business News - MSN MoneyFacebook feature can attract ID thieves- MSN MoneyFacebook IPO hype could bite investors- MSN MoneyVIDEO ON MSN MONEY/* Share1097/*').append($('#scplatformSocialToolBarMain').contents().clone()));jQuery.async('scp', function(){$.scp.async('\x2f\x2fus-social.s-msn.com\x2fs\x2fjs\x2f18.3\x2fue.min.js', function(){$('\x23ahead').not('.stb-boxstyle-l, .stb-boxstyle-r').not($('\x23ahead').next('div.stb-minitb').prev()).after($('').append($('#scplatformSocialToolBarMain').contents().clone()));});jQuery.scp.socialToolbar({"jsUrl":"//us-social.s-msn.com/s/js/18.3/ue.min.js","shareCountUrlBase":"http://social.msn.com/boards","ajaxStubBaseUri":"http://socialcf.co1.msn.com/","responseBridgeUrl":"http://money.msn.com/responsebridge.min.htm","locale":"en-us","strings":{"lc_shrintro":"I thought you would be interested in this: {0}","lc_defml":"Email program","lc_hotml":"Hotmail","lc_gml":"Gmail","lc_yml":"Yahoo! Mail","lc_prt":"Print","lc_rdcmnts":"Read comments","lc_eml":"Email","lc_shr":"Share","lc_numfmt":"{0}","lc_numfmt_thousands":"{0}k","lc_numfmt_millions":"{0}M","lc_numfmt_billions_plus":"{0}B+","lc_share_with_friends":"Share with Friends"},"sharingSites":[{"id":"2","name":"Facebook","icon":"http://media.social.s-msn.com/images/blogs/Facebook.png","smallIcon":"http://media.social.s-msn.com/images/blogs/Facebook-s.png","urlTemplate":"https://www.facebook.com/sharer.php?u=%7Burl%7D&t=%7Btitle%7D"},{"id":"3","name":"Twitter","icon":"http://media.social.s-msn.com/images/blogs/twitter.png","smallIcon":"http://media.social.s-msn.com/images/blogs/twitter-s.png","urlTemplate":"http://twitter.com/home?status=%7Btitle%7D+%7Bs-url%7D"},{"id":"1","name":"Messenger","icon":"http://media.social.s-msn.com/images/blogs/Messenger.png","smallIcon":"http://media.social.s-msn.com/images/blogs/Messenger-s.png","urlTemplate":"http://profile.live.com/badge?url=%7Bs-url%7D"},{"id":"6","name":"LinkedIn","icon":"http://media.social.s-msn.com/images/blogs/linkedin.png","smallIcon":"http://media.social.s-msn.com/images/blogs/linkedin-s.png","urlTemplate":"http://www.linkedin.com/shareArticle?mini=true&url=%7Burl%7D&title=%7Btitle%7D"},{"id":"9","name":"Stumbleupon","icon":"http://media.social.s-msn.com/images/blogs/stumbleupon.png","smallIcon":"http://media.social.s-msn.com/images/blogs/stumbleupon-s.png","urlTemplate":"http://www.stumbleupon.com/submit?url=%7Burl%7D&title=%7Btitle%7D"},{"id":"12","name":"Reddit","icon":"http://media.social.s-msn.com/images/blogs/reddit.png","smallIcon":"http://media.social.s-msn.com/images/blogs/reddit-s.png","urlTemplate":"http://reddit.com/submit?url=%7Bs-url%7D&title=%7Btitle%7D"},{"id":"19","name":"Newsvine","icon":"http://media.social.s-msn.com/images/blogs/newsvine.png","smallIcon":"http://media.social.s-msn.com/images/blogs/newsvine-s.png","urlTemplate":"http://www.newsvine.com/_tools/seed&save?popoff=0&u=%7Bs-url%7D&h=%7Btitle%7D"},{"id":"10","name":"Delicious","icon":"http://media.social.s-msn.com/images/blogs/delicious.png","smallIcon":"http://media.social.s-msn.com/images/blogs/delicious-s.png","urlTemplate":"http://del.icio.us/post?partner=addthis&url=%7Bs-url%7D&title=%7Btitle%7D"},{"id":"22","name":"Orkut","icon":"http://media.social.s-msn.com/images/blogs/orkut.png","smallIcon":"http://media.social.s-msn.com/images/blogs/orkut-s.png","urlTemplate":"http://promote.orkut.com/preview?nt=orkut.com&tt=%7Btitle%7D&du=%7Bs-url%7D&cn=%7Bdesc%7D&tn=%7Bimage%7D"},{"id":"27","name":"Blogger","icon":"http://media.social.s-msn.com/images/blogs/blogger.png","smallIcon":"http://media.social.s-msn.com/images/blogs/blogger-s.png","urlTemplate":"http://www.blogger.com/blog_this.pyra?n=%7Btitle%7D&u=%7Bs-url%7D"},{"id":"42","name":"Tumblr","icon":"http://media.social.s-msn.com/images/blogs/tumblr.png","smallIcon":"http://media.social.s-msn.com/images/blogs/tumblr-s.png","urlTemplate":"http://www.tumblr.com/share/link?url=%7Bs-url%7D&name=%7Btitle%7D&description=%7Bdesc%7D"}],"fbLocale":"en_US","fbLocaleWidthLike":90,"fbLocaleWidthRecommend":130,"fbBoxStyleLocaleWidthLike":55,"fbBoxStyleLocaleWidthRecommend":95,"twLocale":"en","twLocaleWidth":110,"twLocaleWidthNoBubble":55,"gLocale":"en-US","msnShareLocaleWidth":53,"fblkAppId":"132970837947","ver":"18.3","style":"higgreen","gmt":"-5"});});window.async('FB',null,document.location.protocol+'//connect.facebook.net/en_US/all.js#appId=132970837947&xfbml=1');scp_fbCustomChannel='http\x3a\x2f\x2fmoney.msn.com\x2fresponsebridge.min.htm';scp_fblkAppId='132970837947';if($.scpTrack)$.scpTrack.add('scpToolbarMain_v18');//]]> /**/Sign inAdd a comment

7CommentsNewestOldestBestWorstControversialAgemingle. com11 minutes agoOh great article ,Age ain't nothing but a number for these loved-up A-Listers. My BF and I both think so! He is almost 10 years older than me .We met via~~--Ａge'Ｍｉｎｇｌｅ .ＣOM~~ a nice place for younger women and oldermen, or older women and younger men, to interact with each other! Maybe you wanna check it out or tell your friends I don't know, but I certainly would not buy the shares with 1/10th a vote if they could get 1/10th a dividend also. This IPO seems like a way to make insiders big bucks, get some money into the company, and do little if anything for those buying the stock. 0 0ReportSpamDoubting-Skeptic1 hour ago

to Mizkyeva...

One can only hope that it IS true.

0 0ReportSpamrandomnumbers4 hours agoThere are 2 classes of stock. The one with smaller voting rights is the one being issued, and the prospectus says they may (read: most likely will), dilute your shares later on. Also, is it legal for them to declare different dividends for different share classes? I don't know, but I certainly would not buy the shares with 1/10th a vote if they could get 1/10th a dividend also. This IPO seems like a way to make insiders big bucks, get some money into the company, and do little if anything for those buying the stock. 0 0ReportSpamMizkyeva5 hours agoI just got an article on facebook, someone post it and the heading of it says that facebook will end on march 15 2012. so i just wondering if this is true?? 0 1ReportSpamDoubting-Skeptic8 hours agoI tried to become a member of Facebook by signing up for it. My sign up was successful, but shortly thereafter when I was "befriending" my family members I was booted off and got the message "You have been locked out of your account because of security reasons." No other explanations, reasons, warnings, or anything. Then I was told that I could regain my account IF I DID THE FOLLOWING...send them my drivers license picture, my social security number, my drivers license number, and send my cell phone number for verification. I told them that it sounds like they are "phishing" and attempting I.D. theft. There numerous reasons for them to lock somebody out of their account such as swearing, pornography, bullying, threatening, etc. It's their policy rules, and those are good rules. I don't do any of that because I know there are children present. I don't even do any of those in my own house. I was on for maybe 5 to 10 minutes AT MOST after sign up and got locked out for no reason. Now they want to violate their own rules of privacy by SELLING the members cell phone numbers to advertisers for profit. Like I said that is in direct violation of THEIR OWN privacy rules. Now I can't even access my account to delete that account. If they care so little about their members privacy and their own policies, why should they be granted IPO? I wouldn't give them the satisfaction. SORRY Facebook...it sounds like you are just too crooked for my taste. 2 4ReportSpamSecond Look8 hours agoThis may be true but what does it matter if crumbs add up to positive cash flow... I rather die trying then just die. :) 0 0ReportSpamBull Rider10 hours agoThis is an IPO. The big banks and their bestus of all buddies will get to feast on the cake long before you get to nibble on the crumbs. 7 0ReportSpamAdd a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.CategoriesSpamChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatThreats of suicideOtherAdditional comments(optional) 100 character limitAre you sure you want to delete this comment?/**/ DATA PROVIDERS

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