Facebook IPO - Overpriced or Undervalued

Rumoured to be the largest IPO in the World - bigger than Google in 2004

Everyone and their dog is nor on FB (55%+ penetration in developed countries) and they have 800M users and we expect this to surpass a billion by the end of 2012.

Imagine 1B people spending long hours each day explore, connecting, and if Facebook will have their way - spending real money on a platform they have complete control over.

And Facebook wants us to believe that all this is worth 100B dollars in valuation. Is it?

Why Compare

We often hear Facebook being compared to Google, and rightly so I should imagine. If you look at the 2 web wonders, they're both really in the advertising business. Google sells "search intent" whereas Facebook sells demographics and social connections to brands in order to make a large sum of money. In my opinion, this is a perfectly good business to be in.

IPO

Lets recall the now legendary Google IPO from 2004 (famous for its founder's "Do no Evit" maxim.

When Google IPOed - it was the largest Internet IPO, and was already generating profits off the back of revenues of XXX. It was Launched at X times price to sales ratio.

FB on the other hand will launch at a Y price to sales ratio - this is X times more than Google and about 40 times more than the average large sized IPO.

Sales and Revenue

Today at a market cap of 200B Google generates over $9B in profits from a revenue of just about $40B. If Facebook were to IPO for a 100B valuation, we'd expect it do at least half of what Google is pulling in today. But at this point facebook barely scrapes 5B in annual revenues. Thats a long way from if we're gonna be comparing FB to Google.

Conclusion

So if you play it by the numbers above - then Facebook will look like a terrible IPO to put your money into. Can Facebook ever even be as big as Google or will it completely dominate Google on the Internet?

Now there are some who say Mark Z is a smart man and is barely beginning to show his hand. They believe revenues from direct Advertising is just the tip of the iceberg. And I have to say I'm inclined to believe them.

To put things in perspective, Facebook currently makes under$5B in revenues a year. Most of this comes from direct advertising on its site. In 2011, only 11% came from Facebook credits.

Facebook Credits

Facebook Credits - is the first of its growth strategies that will help Facebook become a giant. Imagine the ability to control a currency of your making in an environment which you control. From virtual goods to social gaming - facebook credits lets Facebook take a 30% cut off the top of every single successful application on Facebook. Remember Farmville. It's maker's, Zynga, which incidentally owes its very existence to Facebook, itself had a $10B valuation when they listed in Dec 2011. And Facebook simply creams off 30% off the top of everyone from Zynga to Disney. Now thats a sustainable business model and Apple has proven it.

Facebook Places and Deals

And then there's Places and Deals. If you thought Facebook Pages are the bomb - wait til you see what Places and Deals lets businesses do on Facebook.

Think Groupon! Today Groupon can drive upto $100M in revenue for some retailers in a single day and is worth over $15B. Now imagine the type of revenues Facebook could drive by enabling every single brand or merchant with time and location sensitive deals on Facebook. This alone could contribute profits of $5B in a year's time

Just the begining

This is just the beginning, at the recent IPO filing, Facebook revealed information on technologies and patents it has waiting in the wings. I am sure Mark Z still has a good number of tricks up his proverbial sleeve.

The Rest of the World

Although Facebook growth has just about stagnated in most developed countries, they're having a strong run in the rest of the world. Take Indonesia for example, which has the 3rd largest number of Facebookers in the world but penetration is still at a low of 17%.

In Indonesia, you can sense the exicitement amognst brands, both big and small, about Facebook and its power to connect with customers.

And then there's India - with a measly 4%

Although I can see the value of Facebook and the excitement ithas created for digital industry professionals, I still think a $100B valuation is too

Subtopic