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Why Investors Will "Like" the Facebook IPO

April 11, 2012 | Comments: 0 | Views: 114

I expect Facebook to touch the upper range of its valuation expectations of $100b. I would not be surprised if the valuation touches $120b, and the company makes $10b+ in the offering.

Here is why:

  • Facebook has 850 million active users with 100 billion connections, sharing 5 billion things everyday. Thus, Facebook has more data about consumers than any other company in the world. In the world of advertising this data is key and I would expect Facebook to find more use for this vast treasure of data in the years to come.
  • Facebook operates in the online advertising market that is rapidly growing. US alone is expected to spend $174b in advertising in 2014, up from $154b in 2011. Among the different categories, worldwide Internet advertising is predicted to grow from $72b in 2011 to $113b in 2014. Currently Facebook's share of the advertising pie is just $3b. Thus, Facebook has a large head room to grow and could take a sizable share of this $113b ad spend in 2014.
  • User's search behavior is changing in the past 2 years and more people are now relying on their network to find answers to their queries. If this trend materializes in the future, Facebook could attempt to claim a chunk of the Google's search revenues ($14b).
  • Hot tech companies going into an IPO typically get a 100+ PE (Price to Equity ratio) value. Google could have had a 200 PE but settled for a more conservative 118 PE at the time of its IPO, and has still paid its initial investors handsomely. Facebook's social network competitor LinkedIn had a 980 PE at the time of its IPO. With $1b+ revenues, Facebook could have $100b valuation while still having less than 100 PE.
  • Unlike most social media startups, Facebook has a solid balance sheet with substantial cash reserves ($3.7b) and a healthy revenue & net income growth. Compare this to companies like Groupon that barely makes a profit but claiming a valuation of $9b.
  • In its brief history, Facebook proved to be a very tough competitor and is quick to adapt the popular features in other networks. Since it is very fast moving, I would expect it to stay at the bleeding edge of technology in the immediate future.
  • Its top management that includes CEO Mark Zuckerberg and COO Sheryl Sandberg have a good pulse of the technology trends and have the right mix of aggression and conservatism to take the company forward in the next 5 years.

In summary, I consider Facebook to be a strong buy even at a valuation of $100b. I think the company is fundamentally strong with a stellar balance sheet and has a strong growth. Its management, with all their quirks, is good enough to take their company into the next era.

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Source: EzineArticles
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