Facebook at 99 Times Profit Exceeds 99% of S&P 500 Index
Facebook Inc. (FB) is betting its growth prospects will persuade investors to pay 99 times earnings for its initial public offering, a higher multiple than 99 percent of companies in the Standard & Poor’s 500 Index.
The world’s most popular social-networking site will seek a market value of as much as $96 billion, offering shares at $28 to $35 each, a regulatory filing showed yesterday. The Menlo Park, California-based company will begin meeting investors next week and is scheduled to price the offering on May 17, data compiled by Bloomberg show.
The high end of the proposed valuation would make Facebook more costly than every member of the S&P 500 relative to earnings except for Amazon.com Inc., Leucadia National Corp. and Equity Residential, data show. While 27-year-old Chief Executive Officer Mark Zuckerberg has amassed more than 900 million users since starting Facebook in 2004, his challenge is to stem slowing sales growth amid increasing competition from Google Inc. (GOOG) and Twitter Inc.
“It’s really, really expensive,” said Bob Rice, managing partner at Tangent Capital Partners LLC, on Bloomberg Television. “It’s very hard for me to get my arms around a valuation of 80, 90 billion dollars for a company that did a couple of hundred million dollars of profit in the quarter.”
Facebook’s earnings in the 12 months through March 31 were $972 million, with sales of more than $4 billion. Sales may rise 64 percent to $6.1 billion this year, according to researcher EMarketer Inc. That would be the third straight year of slowing growth in revenue.
The company and its holders plan to sell about 337.4 million shares in the offering. At the high end of the range, the IPO would raise $11.8 billion, making it the largest initial share sale on record for an Internet company.
Facebook is meeting with its lead underwriters at Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc. today in New York to go over talking points ahead of the IPO, according to two people with knowledge of the matter. JPMorgan pasted a Facebook sign flanked by two of the website’s signature thumbs-up icons on the front of its Park Avenue headquarters to welcome the executives.
Chief Operating Officer Sheryl Sandberg is among executives pitching the IPO to investors, using a featured role in a promotional video to tout the company’s mobile prospects. The company is expanding in that area to win advertisers away from Google, its biggest competitor for online ads.
At the top end of the IPO range, Facebook would already have a market capitalization about half the size of Google’s -- even though it has one-10th the sales.
“If you compare it to the number of employees, compare it to the earnings, the valuation is still several times greater than other flagship technology companies,” said Ray Valdes, an analyst at Gartner Inc. in San Jose, California. “Still, there’s a tremendous amount of interest, and the valuation is lower than expected.”
Facebook is offering 180 million shares, while existing owners such as Accel Partners and Digital Sky Technologies are offering 157.4 million, according to the filing. Zuckerberg is offering 30.2 million of his 533.8 million shares. The majority of his net proceeds will be used to pay taxes associated with exercising a stock option.
Zuckerberg may control about 57 percent of the voting power of Facebook’s outstanding capital stock after the offering, according to the filing. Sandberg, who isn’t selling in the offering, holds 1.9 million shares.
Facebook will have 2.14 billion Class A and B common shares outstanding following the IPO, worth about $75 billion at the top end of the price range. Including restricted stock units, options and common stock to be issued following the purchase of Instagram Inc., the shares outstanding would total 2.74 billion, implying a market value of $96 billion at the high end.
Facebook isn’t pursuing the so-called “low-float” strategy employed by some Internet companies to boost initial demand for their stock. The company is making 16 percent of its class A and class B common stock public in the sale, a higher proportion than Internet peers Groupon Inc., LinkedIn Corp. and Pandora Media Inc. sold in their IPOs, Bloomberg data show. Taking into account other shares, options and restricted stock units that may be added, the float would be about 12 percent.
On average, the 28 Internet companies that have completed U.S. IPOs since the beginning of 2011 have floated 17 percent of their shares, Bloomberg data show. In a typical initial offering, investors receive shares worth closer to 20 percent of the company, according to Paul Deninger, a senior managing director at New York-based investment bank Evercore Partners Inc.
Facebook filed for the IPO Feb. 1, using a placeholder amount of $5 billion. Zuckerberg, a co-founder, is the company’s top holder, filings show. The shares will be listed on the Nasdaq Stock Market under the symbol FB.
The initial share sale would dwarf the 2004 IPO of Google, the world’s most valuable Internet company. Google’s offering, the same year Zuckerberg helped found Facebook, raised $1.9 billion and valued the company then at about $23 billion. The company currently has a market value of almost $200 billion.
Facebook follows fellow Internet companies such as Zynga Inc. and Groupon in going public. Zynga, the maker of Internet games such as “FarmVille,” raised $1 billion in its December IPO, while online-coupon provider Groupon raised $805 million, including an overallotment option, in November. Both stocks are trading below their offer prices.
Zuckerberg co-founded Facebook with his college roommates at Harvard University, developing a site that let students socialize over the Web. He later made the service accessible to everyone, intensifying competition with sites such as MySpace and Friendster.
Both eventually succumbed to Facebook, which lured users with innovative features like News Feed, which lets people check on friends’ activities in a single place. News Corp., which bought MySpace in 2005, sold the site last year for a fraction of the price it paid. Friendster revamped itself as a social- gaming platform following its 2009 purchase by Malaysia’s MOL Global Ltd.
Facebook’s revenue surged 88 percent last year to $3.71 billion, with online advertising accounting for almost all of it. The company also expects its focus on the mobile market to yield gains as users spend more time accessing the site through Internet-ready handheld devices such as the iPhone. Success in that field is key to its valuation over time, said Eric Jackson, founder of investment firm Ironfire Capital LLC.
“The real test for Facebook is going to come 12 to 18 months from now,” Jackson said on Bloomberg Television’s “InsideTrack.” “They’re really going to have to prove that they can start to monetize these 900 million users, not just in a desktop environment, but more importantly in a mobile environment.”