By now you've heard and read 100 stories about how Facebook (FB) will soar or flop when it opens for trading. Negative headlines have begun to win out, as more and more media outlets can't help but be skeptical and negative on Facebook. It's hard to wade through all the headlines and to try to understand where Facebook should actually trade. Pricing the IPO above $100B market valuation has a lot of investors jittery. Well, it shouldn't.
So far, we've seen Wall Street indicating how hot Facebook will be by upping the expected price range from $28-34 to $34-$38 and then increasing the share offering from 337M shares to 421M shares. It's set to be the largest internet IPO and possibly the largest IPO offering ever. Now are you ready for the pricing? I'm feeling quite confident it will price at $40/share, above the revised range.
The first day of trading will be hectic to say the least; I can easily make a case for Facebook to be trading in excess of $55 towards $60/share. At that price, the stock would be supporting a hefty $162B price tag. But is that really that expensive? Google (GOOG) has a $200B market cap, Microsoft (MSFT) has a $250B market cap, and Amazon (AMZN) has a $100B market cap. I feel that Facebook is as powerful or more powerful than the likes of GOOG or MSFT. So why shouldn't Facebook be valued at a $175-200B market cap right now?
We've heard rumors that in Asia the stock is 25x oversubscribed, and here it's well oversubscribed too. But if you're worried the stock will collapse like Groupon (GRPN) or Pandora (P), you're gravely mistaken. Index funds who receive partial allocations will buy more shares on the open or during the first day. By my math, Facebook will see nearly 20% of its float bought by indexers of the Russell, MSCI and NASDAQ 100 during the first 3-4 months of trading.
The Russell rebalance and the MSCI will add Facebook by the end of June. The NASDAQ 100 will let Facebook in after 3 months of trading, a rule changed just for Facebook (this helped the NASDAQ get the FB listing). Eventually Facebook will enter the S&P 500 index; however, by this point the lockup will be over and more stock will be presumably sold into the market place.
With 900M users sharing their lives online, you can be sure Facebook will find a way to monetize that into cold hard cash. They will possibly become the most powerful company in the world within 5-7 years. At $60/share (a $162B market cap) we're valuing each Facebook user at just $180, which is low.
Now, I'm not a permabull on Facebook, I just believe the company deserves a healthy bounce on its first day, and that there will be plenty of buyers to support this stock's lofty valuation. Instead of valuing Facebook on earnings from this year or next, we need to look at the big picture of what it will earn 3-5 years down the road.
If I am lucky enough to receive shares from the IPO allocation process (fingers crossed) and the stock pops over $80/share, I would sell. You can't be a successful trader in the long-term if you don't have preset entries and exit prices going into a trade.
Good luck to all; it should be a historic day!