Facebook IPO: Valuation at Approx. $100 Billion

The Facebook IPO has been pegged at an approximate valuation of $100 billion, making it one of the largest IPOs in history. However, I believe this valuation is driven more by hype than solid fundamentals.

At a $100 billion valuation, Facebook would be trading at:

• Price-to-Earnings (P/E) multiple of approximately 77

• Price-to-Sales (P/S) multiple of about 25

The Key Assumptions Behind the $100B Valuation

While the official offer price and exact earnings estimates are still unknown, we can make reasonable assumptions based on available disclosures:

1. Facebook is valued at $100 billion

   • This is nearly twice the valuation of Boeing and about three times that of Starbucks.

2. Facebook has 1 billion monthly active users

   • Each user generates about $4.25 per year.

3. Operating margins remain around 30%

Based on these numbers, Facebook could generate:

• $4.25 billion in annual revenue

• Approximately $1.3 billion in net earnings

At this level, Facebook would trade at:

• P/E = 77

• P/S = 25

Can Facebook Replicate Google’s Success?

Google’s IPO in 2004 was a major success for long-term investors. The company became one of the world’s greatest businesses. Google’s stock price has increased nearly 7-fold since its IPO. More importantly, Google grew into its expensive valuation.

Can Facebook replicate this success story? That’s the big question.

The Comparison with Google

While Google and Facebook share similar ad-driven business models, there are significant differences between the two.

When Google went public, it was valued at a similar P/E multiple but at only 5x sales. Today, Google trades at $600 per share, compared to its IPO price of $85. This makes Facebook’s pricing appear attractive. However, we are projecting Google’s 8-year extraordinary success onto Facebook, which may be unrealistic.

Why Google’s IPO Was Successful

At the time of its IPO, Google earned around $400 million on $3.2 billion in revenue. Fast forward to 2011, and:

• Google’s revenue reached $38 billion

• Its net earnings approached $10 billion

This represented a 36% annual revenue growth and ~40% annual earnings growth. Despite strong returns, Google now trades at:

• P/E ~20

• P/S ~5

In short, Google became cheaper over time, even as its business grew dramatically.

Why Facebook May Disappoint IPO Buyers

While Google’s IPO was undervalued, allowing for future upside, there are no signs of underpricing in Facebook’s IPO. Institutional investors might get shares at the listed price, but retail investors could face 20-40% premiums once trading begins.

Key Differences Between Google and Facebook

1. Business model:
   Google’s model has not gone out of fashion. It monetizes search intent, which is highly valuable.

   Facebook, on the other hand, monetizes social behavior, which can be more volatile and less predictable.

2. Growth Ceiling:
   Facebook is already a much more mature company at IPO compared to Google. With 1 billion users, Facebook already reaches ~14% of the global population (including those without reliable internet access). This limits room for user base growth, and forces Facebook to rely heavily on monetization innovation, which carries risks.

Bottom Line:

Facebook is not Google, despite surface similarities. Google’s future growth was visible at IPO: more searches meant more ad revenue. Facebook’s future growth depends on continuous reinvention, as its user growth inevitably plateaus.

Sometimes, it is wiser to watch the story unfold rather than invest based on hype. If Facebook truly becomes the next Google, there will be plenty of opportunity to invest after the IPO dust settles.

For now, my recommendation: Take a pass.

Disclaimer

This content is for educational and informational purposes only.
It should not be construed as investment, economic, or financial advice. Past performance of any company does not guarantee future results.
Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully.