Facebook May Be More Expensive Than Google
The social-networking company, which filed for the IPO yesterday, may be valued at as much as $100 billion in the sale, two people with knowledge of the matter said last week. At that level, the company would trade at 26.9 times 2011 sales, compared with about 5 times for search-engine operator Google, whose market value has jumped eight-fold since its IPO.
“Google was an awesome IPO,” and its success since is the reason Facebook can come out at such a high valuation, said Tim Cunningham, who helps oversee about $75 billion at Thornburg Investment Management Inc. in Santa Fe, New Mexico. “That hope and potential is exactly why it’s potentially a $100 billion deal.”
Facebook co-founder Mark Zuckerberg is asking investors to pay more than double the valuation of Google’s 2004 IPO even as competition from Google+ and Twitter Inc. increases. Menlo Park, California-based Facebook wrested the lead in U.S. online display ads from Yahoo! Inc. (YHOO) in 2011, taking a 16.3 percent share, according to researcher EMarketer Inc.
Facebook didn’t disclose the number of shares it plans to sell in its filing yesterday, and the amount it is seeking to raise may change. The company is considering a valuation of $75 billion to $100 billion, said the people, who declined to be identified because the matter is private.
Based on the top end of that range, Facebook would be valued at 100 times its 2011 net income. Fast-growing companies’ price-to-earnings ratios often start high and gradually fall. Google, which at its IPO was valued at 121 times trailing 12- month earnings, now trades at about 20 times.
Sales at Facebook, which became the dominant social- networking site in 2008 by leapfrogging pioneer MySpace Inc., surged 88 percent to $3.71 billion in 2011. Net income in that period jumped 65 percent to $1 billion. Facebook’s revenue may rise to $6.5 billion to $6.9 billion this year, EMarketer estimates show.
The site, which has amassed more than 800 million users, makes money by selling ads to companies that want to reach that growing base. Industry wide, spending in the U.S. online display ad market may surge 20 percent this year, according to EMarketer.
To capture those ad dollars, Facebook will have to find ways to continue to engage users. U.S. visitors to Facebook in December spent an average of 7 hours on the service, a 32 percent increase from a year earlier, according to Reston, Virginia-based researcher ComScore. Visitors spent about 4.5 hours on Google’s sites and even less on Yahoo’s.
“The greatest challenge obviously is keeping the advertising momentum because advertising is their key source of revenue,” Debra Aho Williamson, an analyst at EMarketer, said of Facebook. While almost 90 percent of 2011 sales probably came from ad revenue, Facebook also is seeking new sources, such as credits that users buy and redeem for goods and services, she said.
Zuckerberg co-founded Facebook in 2004 with his college roommates, creating a site that allowed students to interact via the Web. He later made the service accessible to everyone, intensifying competition with sites such as MySpace and Friendster, founded in the two years before.
Neither could fend off Facebook, which had a reputation for innovative features like News Feed, which lets people check on friends’ activities in a single place, said Nate Elliott, an analyst at Forrester Research Inc. in New York. News Corp. (NWS), which bought MySpace in 2005, sold the site last year for less than one-tenth the price it paid. Friendster reinvented itself as a social-gaming platform following its 2009 purchase by Malaysia’s MOL Global Ltd.
Facebook raised $1.5 billion from backers including Goldman Sachs Group Inc. and Digital Sky Technologies, according to a January 2011 statement, an investment that implied a total value of $50 billion for Facebook. The company’s valuation is currently pegged at about $74 billion by SharesPost Inc., which handles trading of closely held companies.
Facebook Versus Groupon
Facebook’s sales indicate the stock would be more than twice as expensive as Groupon Inc., which raised $805 million in an IPO in November 2011, including an over-allotment option. The online coupon site went public at a valuation of $12.8 billion, or about 10 times sales in the 12 months through Sept. 30. The company is trading 7.5 percent higher than its IPO price.
LinkedIn Corp. (LNKD), whose IPO price made it more costly than Salesforce.com Inc., peaked at more than double its offer price in July. The offering valued LinkedIn at $4.25 billion, or 14.5 times trailing 12-month sales.
Google, one of Facebook’s main competitors in Web advertising, raised $1.9 billion in its IPO, including an over- allotment option. Founders Sergey Brin and Larry Page wound up halving the size of the offering after accounting errors and an interview with “Playboy” magazine attracted scrutiny from regulators.
They priced the shares at $85 apiece, giving Google a market value of about $23 billion, or about 10 times sales in the 12 months through June 30, 2004. Today the Mountain View, California-based company is worth more than $180 billion, making it the most valuable Internet company.
Like Google, Facebook’s stock “has the potential to stay very high,” said Anupam Palit, a senior equity analyst at the New York-based GreenCrest Capital Management LLC.
Facebook may achieve an operating margin of more than 40 percent over the next two to three years, according to Palit. While that puts the company on par with Google, it’s also more than twice as big as Yahoo’s 2012 projection and about 16 times more than Web-services provider AOL Inc. (AOL), according to data compiled by Bloomberg.
Sustaining growth and its user base may help Facebook avoid the fate of AOL and Yahoo, whose fortunes have dimmed since their 1990s-era IPOs, said Dan Veru, chief investment officer at Palisade Capital Management LLC.
“The moment you try to hold onto what you have, you end up like AOL and Yahoo,” said Veru, whose Fort Lee, New Jersey- based firm manages $3.4 billion. “The history of the Internet industry is littered with franchise-dominant players that are footnotes.”
Yahoo, once the biggest search engine in the U.S., went public in 1996 at a valuation of more than 200 times annualized 12-month sales, based on the nine-month figure disclosed by Yahoo in its prospectus then. Following the ouster of CEO Carol Bartz in September, the company trades at about 4 times trailing 12-month sales and is exploring options as revenue sinks.
AOL hasn’t fared any better. More than a decade ago the company, once the top U.S. Internet service, attempted to leverage that status by buying Time Warner Inc. (TWX) for $124 billion in stock and debt, then the largest deal in the country’s history.
The AOL-Time Warner combination was ultimately dismantled in 2009 with a spinoff of Internet operations as subscribers fled and ad sales plunged. AOL’s market value is now about $1.8 billion, compared with as much as $165 billion before the Time Warner tie-up.
For Facebook, consistent creativity should help spur sales growth and keep users interested, said Forrester’s Elliott.
“Facebook gives people a reason to come back, more than any other social space that has gone before, more than any other social space that we see online today,” he said. “They’re constantly introducing new features and new ways for people to engage with the site.”