Facebook (FB) is going to give street "cred" to a sector waiting for its time. Social Networking is the original AOL model all dressed up with more personalized bells and whistles, which of course allows us to be online friends. Social Networking is about to be placing a large player on the publicly traded stage. Now the most notable enterprise in the sector will debut as a public company, in a shifting IPO date first delivered as May 18, 2012.
The Facebook story for the financial world remains a valuation debate. How can a company command the type of sales multiple already expected on the open market day one? If we allot Facebook the projected $5.8 billion (this year) to $7 billion (next year) revenue stream at 12 times earnings, the price action moves to $70 to $84 per share. What if the company beat estimates? And this question; why does it deserve the double digit revenue multiple applied to its price per share?
This sounds similar to the Amazon (AMZN) debate to me, but I defer to the reality of the market. Logic often has no chance when faced with how a premium is deduced in the open market. The hierarchy of companies allotted 10 Times earnings or greater are simply favorites among institutions. Facebook is reported to be on track to be one of those companies.
Even with its current tailwind, on paper this is a company at a challenge-point for growth. Facebook must amend its current model to appeal to mobile on a scale not yet approached. The completion or failure of that mission will be held as a measuring stick in regard to the company's overall success.
Can Facebook invent an advertising platform for an ever moving target like mobile use? That will be the company's eternal challenge. If it solves that riddle the company will be onto long-term profitability and a permanent place on the best-of-breed preferred stock list.
The mobile aspect of computing is not getting the acknowledgement it deserves. Everything outside of your desktop is morphing into mobile. The inefficient manner in which advertising has been executed thus far with mobile will change permanently, with the advent of a social media brand that sticks in the hand of their user.
Facebook "on the go" gives advertisers a superb opportunity. Now all the gang at Facebook has to do is make it work. The company admits it is not very good at mobile advertising just yet. However, I'm going to give it the benefit of the doubt that it will figure out enough to make a difference to the bottom line. Mobile use is growing but advertising is not keeping pace. That should be a good problem to have, and Mark Zuckerberg agrees by making this his top priority.
So now the ultimate question regarding the Facebook IPO; does it merit capital after it reaches the secondary market? The company will price itself between $28 to $35 ($77 - $96 billion) - reportedly. Once the price action moves beyond a $100 billion market cap the sales multiple becomes stretched even more. Maybe this sector will prove its worth for that type of revenue delivery, but the first day is projected to be a frenzied move. Right now we have the first day in front of us, not an extended period for review.
If the market says this is a double-digit sales multiple stock from the very first moment it trades, then that is the market you have. Facebook has Google (GOOG) potential if it delivers on its focus of mobile. The company also has the ability to hit roadblocks and get battered due to margin compression or lost mobile revenue. The company appears to be given credit by Morgan Stanley to maintain a lofty valuation into the future. Facebook's market capitalization out of the gate will be a testament to that projection.
Facebook has the potential to be a headline play for a long time to come. If the company stabilizes in a range, and maintains the appearance of a sales multiple even as high as 10 or 12, then you have to consider playing Facebook similarly to Google. That is a lofty goal due to the consistent earnings power of Google, but that would be my peer to associate with Facebook. Keeping in mind day one for Facebook could already be up to three times more expensive than Google was during its IPO.
Facebook is going to be in the same neighborhood of Google's sales multiple now (GOOG 18 Trailing P/E), it is my guess that Facebook can keep its market cap intact if it continues to grow revenue. That doesn't mean it will grow in its first three years like Google. I'm saying it is already priced with that benefit of maturity and it will be Facebook's mission to maintain and grow market position right now and into the future. The company is outpacing Google's year over year growth, but keep in mind Google's success at long-haul market position, and its current 25% annual growth rate, which isn't all that bad either.
The idea to keep all of this in mind and knowing when to buy is difficult even for professionals. I can tell because numerous professionals are all over the board with their analysis of this IPO. An individual can do themselves the most good by asking themselves now if they are willing to own Facebook at such an expensive sales multiple. If you can answer that question, you may already know if you are going to be an owner at the open or after a pullback. If you like your IPOs with hoodies and price action drama… this is likely one for you.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.