A Facebook IPO (Eventually)

Facebook, based in Palo Alto, CA, is by far the most popular social network with more than 500 million members worldwide. It began the year 2009 with just over 100 million users.

Founded in 2004 by Mark Zuckerberg while a student at Harvard, it began focusing on connecting with students at Harvard University and eventually high school and then college students nationwide. It has experienced tremendous global growth in a very short period of time. Currently, it is the second most visited website worldwide behind only Google.

Approximately 1,000 employees work at the company.

Facebook Financing

In September of 2004 Facebook took in $500k as its first round of equity financing from two Angel investors formerly with PayPal.

Microsoft, in 2007, became the first formidable corporate investor in Facebook with a well-publicized $240 million equity investment. The Microsoft investment valued Facebook at $15 billion. Yet, at the time, the investment was roundly criticized for being excessive and a sign of a market bubble in the social network space.

In May 2009, Digital Sky Technologies (a Russian firm) invested $200 million in Facebook. This investment stake values Facebook's preferred stock at $10 billion.

In January of 2011, a group of Russian media investors and Goldman Sachs added another $500 million into Facebook.

This most recent Facebook stock sale values the company at approximately $50 billion.

Facebook has now told potential investors that it will either begin disclosing financial data or launch an initial public offering by April of 2012.

Other Internet IPO’s

Before we examine Facebook, it would be useful to look at the two of the most celebrated Internet IPO’s of the past several decades: Netscape and Google. IPO’s of a browser and a search engine.

The Netscape IPO was, without doubt, the hottest IPO of the 1990’s. In 1995 the stock was offered at $28 per share and soared to $75 on the first day of trading (nearly a record for first-day gain). The company's revenues doubled every quarter and a Harvard Business School case study was written about the IPO (Teaching Note 298-020.) Eventually, Microsoft launched its own browser and Netscape’s market share tanked. It was eventually bought by America Online.

Google, in 2004 (9 years later) came public under a Dutch-auction style IPO at $85 per share. Questions about profitability, sustainability and over-valuation (similar to Netscape) existed at the time. However, in this case, Google’s business model was proven sustainable and it gained and surpassed Yahoo and Microsoft over the years. Google’s stock has proven to be an excellent investment over the years. As of Friday, January 17, 2011, Google ended trading at $624.18 per share.

In general, technology and internet IPO’s have proven to be unpredictable and less than satisfactory investments over the years due to the extraordinary risks associated with this equity class.

What type of internet IPO would Facebook be? More like Netscape or more like Google?

A Facebook IPO

With the U.S. stock market continuing to recover from its bear market lows (in early 2009) talk about a Facebook IPO became more prominent in the second half of 2009 and into 2010. Clearly, for now, Facebook has preferred being a private company.

Would you invest in a Facebook IPO?

The Facebook IPO question is somewhat of an unfair one at this stage since it remains a private company with very little financial and operating data known and released about the company.

An IPO prospectus would disclose all the required information for investors to make an informed decision. Reports indicate that Facebook currently produces approximately $1.5 billion in ad revenue. However, history tells us that few investors read and/or understand financial disclosure statements.

Most investors would be basing their decision on how much they like Facebook; how sustainable they feel their business model may be; and, the prospect for immediate stock gains.

Ultimately the question for investors is a simple one: Would you consider investing in a Facebook IPO - the number one social network in the world with an incredible growth rate?

A Facebook IPO (Eventually)

1/17/11