What Happened to Facebook's 2011 IPO? (And Should You Buy It in 2012?)

×

Facebook IPOWith an estimated $100 billion market cap, Facebook's initial public offering was supposed to be the biggest deal of 2011 -- the biggest Internet IPO ever, in fact. For an entire year we waited for it to happen, but no matter how many times pundits tried to slap a date on the IPO, Facebook managed to dodge it.

So, what the heck happened to the Facebook IPO?

The pundits' latest guess is that an IPO will happen sometime this spring. But really, the date's not the most important question. The most important question is: When Facebook finally does go public, should you buy it?

Numbers, Numbers, Everywhere

A recent leak of Facebook's financials for the first nine months of 2011 -- revealed recently on Gawker.com by way of a "source with knowledge of Facebook's finances" -- gives us a few clues. Taking these numbers, and projecting them out through year-end, here's what we find:

2011
Revenue
$3.33 billion
Net Profit
$952 million
Cash and Cash Equivalents
$3.5 billion
Debt
Zilch

Now, leave aside the caveat that these numbers are unverified and unverifiable. Assuming they're true, what do they mean? Here are a few interpretations:

  • Amazingly for a "virtual company," Facebook's $3.33 billion in annual revenues mean that it does more business in a year than Groupon (GRPN), LinkedIn (LNKD), Zynga (ZNGA), Zillow (Z), and Pandora (P) -- the five most-hyped Internet IPOs of 2011 ... combined.
  • Even more surprising, in 2011 Facebook somehow collected $11 in revenues for every man, woman, and child in the country -- despite not charging its customers a penny for its services
  • It also earned good profits off these revenues. While the five companies named above were busy losing a combined $650 million last year, Facebook earned nearly a billion dollars.
  • Perhaps even more incredible, Facebook's profits work out to a 28.6% "net" profit margin for the company. That's better money than Google (GOOG) makes, and it's at least four times better than the profit margins made at "real" companies like Ford (F) or General Motors (GM).

Facebook Doesn't Even Need to IPO

Of course, the most interesting thing these numbers tell us about Facebook and its IPO is that Facebook doesn't need to IPO at all.

Just take a gander at Facebook's bank account -- sitting on $3.5 billion already, and without a lick of debt, Facebook is not your typical IPO candidate. Generally speaking, companies that go the IPO route do so for one of three reasons:

  • To raise cash to pay down debt.
  • To raise cash to fund or expand operations, so they don't have to get into debt in the first place.
  • To help company insiders (venture capitalists, employees, and founders) cash out of the company, and raise some cash for themselves.

It seems that what we're looking at here is a "Door No. 3" situation. Facebook is giving you a chance to cash in on its success because its current owners are looking for a payday.

If Insiders Want Out, Why Should You Want In?

Of course, we won't know for sure who exactly is looking to cash in on the Facebook IPO until the company files its IPO prospectus. Founder Mark Zuckerberg owns a good 24%, while Facebook's other employees are said to own a further 30% of the company. Chances are, when this IPO happens, it's going to mint more than a few millionaires.

So, should you help out with that? Should you, to put it plainly, buy the Facebook IPO?

If Facebook debuts at $100 billion as expected, the company would sport some pretty eye-popping numbers post-IPO. A 105 price-to-earnings ratio, for one thing. (Google only costs 22 times earnings.) On the other hand, if unverified, unverifiable numbers can be relied upon, Facebook's earnings this year will be double what it earned in 2010, which was in turn double what it earned the year before that.

Numbers like these get an investor to thinking: 105 times earnings, divided by a growth rate that seems perfectly capable of hitting 100% growth year after year (at least, for two years ...) works out to an almost perfect 1.0 "PEG ratio" -- the value investor's metric for a fairly priced stock.

And that's perhaps the most surprising revelation of all about the Facebook IPO. Even at a $100 billion valuation, this stock just might be a bargain.

Motley Fool contributor Rich Smith owns shares of the last great Internet IPO: Google. The Motley Fool owns shares of Google and Ford Motor. Motley Fool newsletter services have recommended buying shares of Google, General Motors, Ford Motor, and Zillow. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor.



Increase your money and finance knowledge from home

What is Short Selling?

Make a profit when stocks prices fall.

View Course »

Small Cap Investing

Learn now to invest in small companies the right way.

View Course »

Add a Comment

*0 / 3000 Character Maximum

6 Comments

Filter by:
freeze1617

I have a Facebook account that I never use. I mean looking at pictures of people you hardly know is not my thing. It is so stupid, everybody is everybody's friend. Sooner or later companies are going to find out that online advertising is a waste of money. Very few pay attention to it and fewer are influenced by it. Facebook is what Wall Street needs, it needs new darling companies.Just like any business. The NFL, MLB, NBA, NHL, PGA etc all promote their young stars to keep the future bright. Most fade and never live up to the hype. This is what Facebook is to Wall Street

January 12 2012 at 10:00 AM Report abuse rate up rate down Reply
shidelera5

COULD AOL COME ALONG AND CLEAN THIS PLACE UP? RID IT OF THE JERKS THAT POST THE SAME CRAP TO EVERY ARTICLE!! IM PAYING 25 BUCKS MONTH FOR THIS - YOU KNOW !!

January 11 2012 at 12:16 PM Report abuse rate up rate down Reply
1 reply to shidelera5's comment
bggdg

You're paying $25/month for AOL?

You should check out the bridge I've got for sale. Great price!

January 11 2012 at 1:14 PM Report abuse rate up rate down Reply
chaspharrington

NO DON'T BUY IT, ITS JUST WORTHLESS PAPER, THIS IS A COMPANY WITH NO PHYSICIAL ASSETS, SO BASICLLY YOU WOULD JUST BE PURCHASING PAPER, GO THE OFFICE STORE , BUY SOME PAPER AAND SAVE YOUR MONEY!!!

January 11 2012 at 9:47 AM Report abuse rate up rate down Reply
1 reply to chaspharrington's comment
bggdg

Here's an idea.

How about you buy 1000 shares of Facebook on the IPO. Simultaneously, I'll go to Office Depot and buy some copier paper. Since they are worth the same, I'll trade your papoer for mine.

We'll be "even"!

LOL!

January 11 2012 at 11:11 AM Report abuse rate up rate down Reply
RJBach

There were some recent hyped up tech IPOs like Zynga's that fizzled out but I think Facebook has a chance to blow this out of the water. Facebook has the traffic numbers and is starting to get the revenue numbers to justify their valuation. Mainstream brands are promoting their Facebook URLs in national TV ads. There are more and more companies listed at http://www.buyfacebookfansreviews.com that do nothing other than promote Facebook pages to people. The final piece of the puzzle is that Facebook is going to announce some new market they're entering (SEARCH, IMO) right before the IPO. Social networking is starting to get saturated with Facebook nearing a billion active users...but there's still ecommerce, search, web-services, and other new markets they can expand to. This potential for diversifying the markets they compete in and creating major new revenue and traffic streams is why Facebook has a chance to really exceed already lofty expectations.

January 10 2012 at 3:34 PM Report abuse rate up rate down Reply
1 reply to RJBach's comment
bggdg

Certain of Facebook's markets are certainly becoming saturated (the US, for example). But in places like China, which has far more people, Facebook's penetration is still below 1%. Local laws are largely responsible for this, but it's going to be increasingly difficult to continue to politically suppress Facebook.

January 11 2012 at 8:35 AM Report abuse rate up rate down Reply
SPQR

Facebook is the Pet Rock of the 2000s

January 10 2012 at 3:06 PM Report abuse +1 rate up rate down Reply
1 reply to SPQR's comment
bggdg

You tell 'em, Jethro

LOL!

January 11 2012 at 10:26 AM Report abuse +1 rate up rate down Reply
Sean

So, if one decided to jump in and participate in the IPO, how would one go about it? Since this is an IPO, the stock would not be available through the normal methods (like your regular brokerage account) until after the IPO. The company running the IPO will generally sell shares only to their biggest customers, corporations, big funds, high-value individuals, etc. Is it even possible for a "normal" person willing to invest, say, $10,000, to participate in a big IPO like this?

January 10 2012 at 1:06 PM Report abuse +1 rate up rate down Reply
1 reply to Sean's comment
bggdg

Generally, IPO's that are oversubscribed are doled out on a pro rate basis, meaning if you have an account at a brokerage firm who is part of the underwriting group for a deal, and you indicate an interest in 1000 shares, and the entire deal is oversubscribed by 2:1, you'll likely end up with 500 shares.

January 10 2012 at 2:56 PM Report abuse rate up rate down Reply