Social media company Facebook will be worth more than $100 billion when it lists on Nasdaq later today, making it the richest technology debut ever.
At $38 a share, the top end of its expected listing price, the company will have a price to equity ratio that makes it seven times more expensive than Apple.
At that price, Facebook will have to grow earnings eight-fold this year in order to be on par in terms of price-to-earnings with the biggest technology stocks. Currently, analysts have it on a forward ratio of 18 in 2014, which means those who cover the stock expect it to gain turnover.
The social media giant and shareholders are offering more than 400 million shares in an offering expected to raise more than $6 billion for the company. Its stock could close as much as 40% higher on the opening day and its shares will start trading after 4pm South African time today.
As big as India
Facebook was founded by CEO Mark Zuckerberg, in 2004, in his Harvard dormitory room. It currently has 901 million monthly active users, about 80% of which live outside of Canada and the US.
Of those monthly active users, 526 million visit the site on a daily basis. With a population of almost a billion, Facebook's user base is almost the same size as the population of India, and almost three times bigger than that of the US.
In one of Facebook's latest filings with the Securities and Exchange Commission, it said it had 488 million monthly active users who used Facebook mobile products in March 2012, and more than 500 million mobile monthly active users as of 20 April.
During March, on average, 398 million users were active on Facebook on at least six out of the last seven days. An average of 3.2 billion “likes” and comments were generated by Facebook users every day in the first quarter of the year.
Zuckerberg, who will control 55.8% of the listed entity, will be worth around $19 billion. The 28-year-old will sell 32.2 million shares in the initial public offering.
Connecting people
Yet, Zuckerberg says “Facebook was not originally created to be a company. It was built to accomplish a social mission - to make the world more open and connected.”
In a letter to shareholders, Zuckerberg writes: “There is a huge need and a huge opportunity to get everyone in the world connected, to give everyone a voice and to help transform society for the future. The scale of the technology and infrastructure that must be built is unprecedented, and we believe this is the most important problem we can focus on.”
Compared with other technology offerings, Facebook's shares seem overpriced. The company only turned over $3.7 billion in the year to December, reporting a net profit of $1 billion, and does not intend declaring a dividend any time soon.
Apple, which is trading at $530, made $39.2 billion in the three months to March, posting a quarterly net profit of $11.6 billion. Its price to earnings ratio is about 13 times, and analysts expect it to boost earnings by about half this year.
“Simply put: we don't build services to make money; we make money to build better services,” says Zuckerberg.
All hype?
Vestact analyst Sasha Naryskine says Facebook's listing will be bigger than Google and LinkedIn. The social network will also have a market capitalisation of almost 12 times that of LinkedIn, he adds.
Naryskine points out Facebook is “the business end of the new world”. He says Facebook is the most specific advertising portal in the world and everybody is excited about its listing.
He says Facebook's price could close as much as 30% to 40% higher on the first day, although its true value will take a while to settle. Naryskine points out that the company is generating earnings, making it different to when the dot-com bubble burst more than a decade ago. “It all depends on the quality and the hype, and everybody wants a piece of Facebook.”
Chris Gilmour, Absa investments analyst, argues that Facebook's price is inflated, because of the hype around the company. He says the stock is “way off the stratosphere”.
Giimour points out that Facebook's earnings would have to grow eight times this year, and its stock price remain flat, to settle on the same level as Apple. “People are buying into the hype.”
Facebook could also continue buying companies, such as Instagram, which would keep the hype going, says Gilmour. The share price will settle as sanity prevails, says Gilmour.
However, Facebook's listing is likely to result in more competition in the social media arena because it will be so successful, Gimour adds.
Click here to see Facebook by numbers.
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