Reports are that Facebook is preparing to file its S-1 with the SEC as early as this coming Wednesday, setting the stage for what would be one of the biggest IPOs. The company is estimated to raise as much as $10 billion, which would value the social networking giant at somewhere between $75 billion and $100 billion. Facebook is undoubtedly the social networking leader, and possibly one of the top three to five leading internet companies of our time.
Needless to say, the retail investor will be bombarded with information on how significant the company is in terms of how people do and will communicate, connect, and consume information using Facebook, and perhaps some will even make comparisons to Google Inc.'s (GOOG) meteoric six-fold rise since its IPO just over seven years ago in making their case for Facebook.
While Facebook's dominance of the social media category, indeed the sheer impossibility to even build an effective competition in the years ahead given that it has already captured 800 million subscribers, infusing Facebook into their lives with ever more innovative features, cannot be argued against, we believe the proper question isn't how dominant and successful Facebook is. Instead, the proper question, since we already know what we stated above as almost self-evident, especially smart (institutional) money that already has significant stakes in it, is will the IPO valuation leave any value to be captured by the retail investor?
This is especially an important question given how poorly most social media IPOs have fared recently. Some examples:
- Social games developer Zynga Inc. (ZNGA) shares are just now creeping above their IPO price after spending the last six weeks below it;
- Renren Inc. (RENN), often touted as the Facebook of China, trades at prices over 60% below its IPO last April;
- Online streaming music provider Pandora Music Inc. (P) also trades well below the IPO price of $16;
- Groupon Inc. (GRPN), a provider of discount deals from local retailers, is just now trading above its IPO price of $20, but still well below levels of $25-$30 that most retail investors bought in the opening days;
- Online professional social networking platform operator LinkedIn Corp. (LNKD) trades well above the IPO price of $45, but still well below the $80-120 levels at which most retail investors bought in the opening days;
- Social networking and gaming platform operator for the Latino community, Quepasa Corp. (QPSA), is also trading near its lows; and
- Friendfinder Networks (FFN), a provider of online personals services, is also trading near its lows, at below $1, and well below the $10 IPO price from just last May.
We tried to answer at least part of that question by comparing the proposed valuation of Facebook to its peers in the online social networking space, by comparing them on valuation variables such as price-to-sales ratio and price-over-adjusted EBITDA ratio. Besides the new social networking pure plays, we have also compared them to more established players such as Google Inc. that is a social media player via its YouTube and Google+ offerings; and Sina Corp. (SINA), a Chinese internet portal offering that is also a destination for the global Chinese communities. The following table gives an overview of that analysis:
click to enlarge
As illustrated, Facebook with a $90 billion market-cap, would be trading at the top range based on PSR, and in the top one-third based on adjusted EBITDA. While it is perhaps appropriate that Facebook trades at a premium valuation compared to its peers, based clearly on its potential and the lack of formidable competition, and its higher projected growth, it is questionable if after an IPO at such a premium valuation, the retail investor buying near or above the offering price in the opening days will have much value to capture.
As we argued before, it seems that because of the self-evident nature of the potential of these social networking IPOs, much of the value may already have been captured by private investors that would be cashing into the IPO. We believe that investors looking into exposure to the social media category may want to wait and possibly buy Facebook at lower prices, or consider exposure to it by investing in a self-created basket of such stocks trading at more reasonable valuations. Also, another possible way to play the social media space would be by investing in the Social Media ETF (SOCL) that launched just last November by Global X, and is currently invested in about 25 stocks.
Credit: Fundamental data in this article were based on SEC filings, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
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