The Facebook (FB) IPO on May 18, presents a rare chance to own an ultimate consumer stock, a company that almost everyone has heard of or is actively using as a social media gateway to the world.
FB is estimated to grow revenues in the range of 36% for 2012, which is lower then what they achieved in the Q1 year over year of 45%. The law of large numbers is starting to hit their growth rate as they have achieved over one billion dollars in revenue in each of the last two quarters.
People are making comparisons to other companies that generate revenues from advertising. The name that is frequently mentioned is Google (GOOG) as a comparison company. My goal in researching FB was to compare their growth rate at the time they achieved 1 billion in quarterly revenue against GOOG's growth rate when they started achieving 1 billion in revenue per quarter back in 2005, and to come to some conclusion what a fair value for FB could be. Below is a comparison of both their year over year growth rates and the two previous years growth rate prior to sustaining 1 billion per quarter in revenue growth.
- 2010 2011 2012
- 152% 88% 36%
- 2003 2004 2005
- 234% 118% 92%
Notice that GOOG achieved more than 2.5 times the year over year revenue growth percentage that FB is estimated to do in 2012. The comparison is made with both companies achieving quarterly revenue of 1 billion or over per quarter. It was not until 2007 that GOOG's revenue declined to current FB expected levels.
Next, I wanted to compare GOOG's market cap at the time they began running 1 billion in quarterly revenues and achieving 92% yr/yr growth, and compare to FB estimated market cap on IPO day, also running 1 billion in quarterly revenue and a 36% revenue growth rate.
- 75B - 90B Range
- 40 Billion Market Capitalization
Notice that FB is commanding more than double the market cap (mid range) than what GOOG achieved at the time both companies began sustainable quarterly revenues of 1 billion or more.
Head Count: (year over year % change in headcount)
- 2011 to 2012 = 45%
- 2003 2004 2005
139% 86% 88%
FB states in their most recent filing, they expect headcount growth to continue for the foreseeable future. Up to now, they have done a good job of keeping headcount growth intact. Any appreciation up to the level of GOOG will have an impact on the bottom line.
If FB and GOOG were running IPO's at the same time they both started achieving 1 billion in revenues, GOOG would be seen as the logical choice to commit capital based on revenue growth rates and market cap valuations. The hype of 900 million users on Facebook is certainly driving this IPO to twice the level that GOOG would obtain under similar conditions. This disparity is just one reason we will be sitting on the sidelines.