As if looking for things to speculate in, upon hearing of said filing, the public plunged into whatever equities seemed likely to benefit from it. What the speculative masses mostly found attractive were Chinese web stocks RenRen (RENN) and Sina Corporation (SINA) as well as some other tech properties, such as Pandora Media (P), LinkedIn (LNKD) and Zynga (ZNGA).
The impact was clear in the intraday charts. (Click to enlarge)
Basically, the filing was seen as an excuse to speculate heavily on dubious web properties. But, will the IPO be positive for these properties? Were the rallies warranted?
This is highly doubtful, for at least two reasons:
Facebook will have a comparable or lower valuation
As expensive as Facebook is expected to get once it IPOs, Facebook is actually a very profitable company. Right now, expectations are mostly for a $100 billion market cap at the IPO price. So what kind of valuation will Facebook have at that price? We'll know exactly when the IPO filing takes place, but for now and using public estimates, we gather that Facebook will have produced somewhere around $4.1 billion in revenues and $2 billion in EBITDA (an EBITDA margin of 50%) during 2011. At a $100 billion market cap, this would mean a TTM price/sales of around 24, and a TTM EV/EBITDA below 50 (given that Facebook will certainly have a lot of net cash).
So how do these speculative stocks that were caught up in the IPO hype, compare?
RenRen trades at a TTM price/sales of 19.6 and EV/EBITDA of 77.6
Sina Corporation trades at a TTM price/sales of 9.5 and EV/EBITDA of 54.5
Pandora Media trades at a TTM price/sales of 8.7 and EV/EBITDA of 128 (using 6% EBITDA margin from last Q over TTM revenues predicted for the January quarter, as TTM there is no EBITDA)
LinkedIn trades at a TTM price/sales of 16.2 and EV/EBITDA of 132
Zynga trades at a TTM price/sales of 6.5 and EV/EBITDA of 32
So basically some of the shares that rallied on the news are actually as expensive, or more expensive, than Facebook itself is expected to be at its IPO price (using EV/EBITDA, price/sales is not very relevant here as Facebook's revenue is much higher margin than these companies' revenues), even though Facebook will clearly be the sector leader and as such, be deserving of a premium over all these bit players.
Facebook will drain money from the theme
There is a limited pool of speculative investment dollars that wants to be in fast-growth, high-multiple, web/tech stocks. Some of the money that will buy into Facebook comes from that pool. Since the Facebook IPO is expected to be as large as $10 billion, it will actually remove a lot of liquidity that right now is moving towards these stocks.
So, instead of favoring higher prices in these high-multiple stocks, the Facebook IPO will actually pressure them lower once it happens.
The Facebook mania we witnessed during Friday has a high likelihood of reversing itself due to the very IPO that launched the mania, since Facebook will be more attractive than these stocks, and will drain liquidity from them.