The media reports that Facebook's IPO valuation could be in the range of $100 billion perhaps by April 2012.
"Facebook’s $100 billion valuation would be twice as high as it was in January, when the company announced a $1.5 billion investment from Goldman Sachs Group Inc. (NYSE:GS) and other backers," according to Bloomberg.
Four years ago Facebook was worth only $500 million. At a $100 billion market cap it seems reasonable that 100% of Facebook's rational shareholders will want to sell -- because at that level future risk will not be worth potential future rewards in their (rational) eyes.
SANITY CHECK COMPARISON WITH GOOGLE and EBAY
Google's (NASDAQ:GOOG) IPO valuation was a mere $23 billion, which has since balloned to $190 billion. Ebay's (NASDAQ:EBAY) IPO market value the first day was only $2 billion, and has since grown to $38 billion.
On a comparative basis, Facebook's $100 billion IPO valuation is off the charts.
IS THERE ANY POTENTIAL PROFIT FROM A $100 BILLION VALUATION?
Normally with a growing tech stock IPO aftermarket investors want to believe someone else will pay double their price down the road.
In the case of Facebook, that 'double my money' inclination might be considered an example of the greater fool theory, because the fourth largest company in terms of market capitalization, Microsoft (NASDAQ:MSFT), is worth only a little more than twice Facebook's talked about $100 billion market cap, and MSFT sells for only 9x earnings.
The four largest companies in terms of market capitalization, according to Google Finance are
. Exxon Mobil (NYSE:XOM) selling at 9x earnings with a market cap of $363.5 billion
. PetroChina Company Limited (NYSE:PTR) selling at 10.3x earnings with a market cap of $229.3 billion
. International Business Machines (NYSE:IBM) selling at 14.4x earnings with a market cap of $214.8 billion
. Microsoft (MSFT) selling at 9x earnings with a market cap of $209.2 billion
Notice that in general, according to the law of large numbers, as a company gets bigger is P/E multiple gets smaller. Salesforce.com (NYSE:CRM) is currently an exception (see below), but its market cap is only $15 billion.
DECLINING RATE OF USER GROWTH
Facebook's rate of user growth has declined, although national advertisers do like the Facebook 'channel' -- but Facebook's era of hyper-growth is clearly over.
For example, in May Facebook had 750 million users, now they have 800 million users. If you saw those numbers without the Facebook name you'd probably say 'so what'.
FACEBOOK IS A GOOD QUICK IPO FLIP
Facebook should be a good IPO quick flip, nothing more
There will be upward pressure on the stock at the open no matter what the IPO price is -- from uninformed, overly enthusiastic Facebook users who were not around for the 2000 dot com bust.
In fact, after six months Facebook will probably act like the Linkedin (NYSE:LNKD) IPO after market disaster. Or, it could even track the IPO aftermarket disasters of Angie's List (NASDAQ:ANGI) and even Groupon (NASDAQ:GRPN).
In the beginning, it's best to let the (overly) emotional users/stock buyers have their cake. At some point in time 'normal' valuation metrics have to apply. For example, Google sells at 29x earnings and has a $190 billion market capitalization. Oracle (OCRL) sells at 17x earnings and has a $150 billion market capitalization.
On the other hand, Facebook enthusiasts probably want to believe Facebook is worth 5300 times earnings just like Salesforce.com.
Valuatio sources: Google Finance
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.