All Tech Considered
1:14 pm
Mon January 30, 2012

Facebook IPO: Worth The Price Or Next Internet Bubble?

Originally published on Mon January 30, 2012 10:02 pm

Many investors are expecting Facebook to file papers for an initial public offering sometime later this week. The company, which was founded in a Harvard dorm room less than a decade ago, is expected to be valued at nearly $100 billion by Wall Street.

And if these early reports are true this is shaping up to be the biggest Internet IPO ever.

"It will be larger than the Google IPO — larger than the Amazon IPO — the largest internet IPO in history," says Kathleen Smith. She tracks initial public offerings at Renaissance Capital. "It's rumored that they will seek to raise $10 billion."

The deal could create more than 1,000 Facebook millionaires and is likely to give Facebook's 27-year-old co-founder and CEO, Mark Zuckerberg, a net worth north of $20 billion — at least on paper.

So this all kind of raises the question: Is Facebook worth the price, or is this another Internet bubble in the making?

"This is very expensive company, let's face it," says Sam Hamadeh, who follows the tech industry and Wall Street for the financial research company PrivCo. "At $100 billion you are talking about one of the largest companies in the United States, or the most valuable companies. The upside is reasonably limited."

Hamedeh believes this is one of the reasons that Morgan Stanley may end up leading the IPO instead of Goldman Sachs. Morgan has an enormous network of brokers who sell stock to wealthy individuals like doctors, lawyers and retirees.

"Those are the kind of people who will buy without digging too much into the numbers or being picky about the value of the company," he says. "They tend to buy company names that they recognize."

Hamedeh says these retail investors tend to be less price sensitive than the big institutional investors Goldman Sachs typically deals with.

And Hamedeh says Facebook will have to grow like a weed for years to justify its stock price.

But the reason so many investors seem optimistic is that Facebook has been growing like a weed.

"We forecast that Facebook's revenue in 2010 was about $2 billion," says Debra Aho Williamson, an analyst at eMarketer, which tracks online advertising sold by private companies.

She says this year Facebook brought in more than $4.2 billion in revenue, "so you can see that it more than doubled from 2010 to 2011," she adds.

The year before that Williamson estimates that the company's revenues tripled. Earnings figures won't be available until the company files to go public and releases audited financial statements.

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Transcript

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BLOCK: Many investors expect Facebook to file papers this week for an initial public offering. The company, founded in a Harvard dorm room less than a decade ago, is expected to be valued at 80 to $100 billion.

From Silicon Valley, NPR's Steve Henn reports.

STEVE HENN, BYLINE: If the early reports are true, this is shaping up to be the biggest Internet IPO ever.

KATHLEEN SMITH: It'll be larger than the Google IPO, larger than the Amazon IPO, and the largest Internet IPO in history.

HENN: Kathleen Smith tracks initial public offerings at Renaissance Capital.

SMITH: It's rumored that they will seek to raise 10 billion in their IPO.

HENN: And Smith expects the deal could value Facebook at something close to $100 billion. It could create something like a thousand new Facebook millionaires and give Marc Zuckerberg, Facebook's 27-year-old CEO, a net worth north of $20 billion, at least on paper.

So this leads to the question: Is Facebook really worth this? Or is this another Internet bubble in the making?

SAM HAMADEH: This is very expensive company, let's face it.

HENN: Sam Hamadeh follows the tech industry and Wall Street at PrivCo.

HAMADEH: So, at $100 billion, you're talking about one of the largest companies in the United States, or the most valuable companies in the United States. The upside is reasonably limited.

HENN: Hamadeh says Facebook would have to grow like a weed for years to justify its stock price, and other analysts agree. They say investors who by shares are betting that it will more than quadruple in size. The reason investors and Wall Street are optimistic is that the company actually has been growing like a weed for years.

Debra Aho Williamson is an analyst at eMarketer. She estimates last year Facebook's revenue more than doubled. They year before that, it tripled. But she thinks this year that 100 percent growth rate will fall by half.

DEBORAH AHO WILLIAMSON: But that doesn't necessarily mean that, you know, Facebook is a failure or that Facebook has done something wrong. I mean, you know, 50 percent revenue growth in advertising is still huge and enormous, and something that most media properties would salivate over. Right?

HENN: And Williamson believes there will be myriad ways for Facebook to make money down the road.

WILLIAMSON: The real reason why investors are valuing Facebook so highly is because of the promise. They think that Facebook may be the future of how we use the Internet.

HENN: Investors seem eager to bet billions that Facebook's grand future actually comes to pass.

Steve Henn, NPR News, Silicon Valley. Transcript provided by NPR, Copyright NPR.