Facebook Palooza

Facebook's income: 2009 - 2011

It's Facebook Palooza at the Wall Street Journal, where there are over a dozen articles and blog posts about Facebook's S-3 filing for the IPO.

There's a lot to mull over, but I've already concluded that I won't be buying the stock when it becomes available. (Here's why you should not listen to me: I could have bought Google on the day after its initial public offering for $100 but didn't get in till GOOG surpassed $400. Still here? Okay, you were warned.)

There's no question that Facebook's revenues and earnings will rocket upward....for a while. Let's say that FB's 2011 net income of $1 billion rises to $10 billion in 2015 (for example, doubling for three years running, then tapering to "mere" 25% growth in year four). Applying a price-earnings ratio of 20--the same as Google's current trailing twelve-month multiple--results in a 2015 company valuation of $200 billion, a doubling of today's $100 billion IPO value.

Such price appreciation (19% compounded annual growth rate) would be very good, to be sure, but it also may be achievable without taking the risk of investing in an IPO. Stocks with a much longer track record, such as my January 7, 2012 portfolio, are already up 19% for the year.

The WSJ compares Facebook with Google:

                          Google          Facebook
2011 Revenue             $37.9 billion   $3.7 billion
Growth rate from 2010     29%             88%
2011 Income              $9.74 billion   $1 billion
Growth rate from 2010     15%             65%
Employees                 32,467          3,200

Google triumphed by defeating competitors like Yahoo. Facebook has a tougher challenge because it has Google in its way. Other risks (slower customer growth, loss of key employees, etc.) listed in the S-3 are those which one might expect.

[Update: although Mark Zuckerberg owns "only" 28% of Facebook, he controls it through the tiered share structure and agreements with other large shareholders. If you invest in Facebook, you'll be stuck with Mark, for better or worse, in sickness or in health.]

But let's not get too negative: there's a reasonable chance that I'll have regrets for not investing in Facebook, but it's hoped that the performance of my other investments will ease the pain.

[Update - 2/4: A WSJ analyst isn't impressed with Facebook's potential upside.

If Facebook's shares rose from a total initial value of $100 billion to $190 billion 10 years from now, they would deliver a 90% cumulative gain, for an average annual return of 6.8%. Bottom line: "The valuation is so high today that the upside potential is limited," (Finance prof Jay) Ritter says.]

© 2012 Stephen Yuen