Is The Facebook IPO Just Speculation?

By Arthur Pinkasovitch | January 12, 2011 AAA

Mark Zuckerberg's creation, Facebook, has surely come a long way since 2004. With over 500 million users, people spend nearly 12 billion hours Facebooking per month. Towards the end of 2010, Facebook became the third most commonly visited worldwide website after Google (Nasdaq:GOOG) and Microsoft (Nasdaq:MSFT)-based sites.

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A Facebook IPO has been the subject of much discussion in the blogosphere throughout 2010, but recent events indicate that such an event is likely to gain traction this year. After a $1.5 billion equity offering through Goldman Sachs (NYSE:GS), institutions, hedge funds and private equity firms have shown strong demand for the social networking site.

Facebook Valuation
According to the Wall Street Journal, some analysts predict that Facebook generated approximately $2 billion dollars in revenue in 2010, which, based on the $50 billion suggested market cap, would indicate a price-to-sales ratio of 25. As a measure of comparison, high-growth companies such as Amazon (Nasdaq:AMZN) and Apple (Nasdaq:AAPL) trade at price multiples of 2.71 and 4.69 respectively. Furthermore, based on predicted 2009 net operating margins of 25.7% and estimated 2010 performance, the $50 billion market cap suggests a price-to-earnings multiple of 97. Such valuations have some analysts concerned, while others see Facebook historical growth and additional growth opportunities as justification for such a multiple.

Forced IPO?
SEC requirements mandate that companies with over 500 investors disclose their financial information; typically at this time it would make sense to take a company public. This was expected to be one of the underlying forces that pushed Google to IPO. Although Facebook currently has less than the threshold amount of shareholders, with a growing interest in buying a piece of the internet sensation, Facebook is predicted by many analysts to IPO in 2012.

Tech IPOs
Social networking sites such as Twitter and LinkedIn may also go public this year. Even Groupon, after rejecting Google's $6 billion dollar takeover offer may have an IPO in 2011 as the social buying website is reported to be negotiating financing commitments for an estimated $950 million with Morgan Stanley (NYSE:MS) and other institutions.

Bottom Line
Many of the figures regarding Facebook's revenue and earnings estimates are still uncertain and the potential that it is likely to soon go public is largely based on speculation. Furthermore, Mark Zuckerberg has mentioned several times that he is not in a rush to move forward with an IPO.

With continually improving market conditions, many private technology companies are likely to begin issuing shares on the open market. Whether or not Facebook decides to pursue such a course of action is still largely unknown - although it is appearing likely. (For additional stock analysis, see Is Salesforce.com's P/E Ratio Justified?)

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