Facebook IPO Price: Overvalued or Valuation Something to Like?

Facebook IPO Price: Buy or Beware? As Facebook IPO Nears, People Discuss Price of FB Shares and Whether Company is Overvalued

Staff Report

NEW YORK, NY - If you search the Internet for news of the impending Facebook IPO (which may raise up to $11 Billion), you are going to see two sides to the story. There are those who - like Steve Wozniak, co-founder of Apple - are planning on buying Facebook stock no matter the initial price. On the other end of the spectrum, there are some analysts who are saying it may be better to wait a few days to see where shares of FB are going to settle after the initial offering.

The Boston Herald recently ran a piece about how Facebook will do when it is available for the public to buy. They quoted Kerry Rice, an Internet and digital media analyst with Needham & Co., as saying, "It’s oversubscribed. That’s kind of an indication it’s going to be a very volatile trading range initially. If you buy at peak demand on the first day, it becomes a question of whether you make money.”

While Facebook had $1.06 billion in revenue for Q1 of 2012 - a 45% rise from 2011 - the company's profits fell 12% (to $205 million), according to a recent regulatory filing. This has some wondering if the $11.8 Billion valuation that is expected if all 337 million Class A shares sell for the estimated $28 to $35 that Facebook wants to receive.

With so many people clamoring for the stock, however, the price may initially rise quite a bit. During the next few trading days (and after the weekend), the price will most likely settle according to some analysts. The Financial Times quoted Lise Buyer, an IPO adviser with the Class V Group, as saying,"Because it’s such a high-profile deal, there is reason to think there will be an unhealthy amount of investor glee day one, but we don’t know that will happen.”

Some companies - liked LinkedIn - have done pretty well with an IPO, while others have not fared so well. For example, Groupon shares jumped 50% on their first day of trading. However, they have dropped to around $10 in recent months. There are also other companies who have not done so well.

In a recent Bloomberg piece titled, "Facebook IPO Overvalued at $96 Billion in Global Poll," they talked about the number of people who think the company may be overvalued. In the Bloomberg poll, 82% of people polled outside the United States thought Facebook was overvalued.

They quoted Filippo Garbarino, who oversees $50 million at Frontwave Capital Ltd. in Chiasso,Switzerland, as saying, “It’s overvalued at that price. Investors are becoming more selective and there are quite a few fallen angels around, like Netflix. Those who buy Facebook at these levels are more speculators than investors.”

Back in October of 2011, there were already those who questioned the value of Facebook and whether it was a harbinger of another dot com bubble about to burst. (On top of other recent offerings like Groupon.) Peter Cauwels and Didier Sornette, econophysicists at the Swiss Federal Institute of Technology in Zurich, crunched some numbers last year and predicted that Facebook's user growth would eventually quit growing so fast - and that that was a good way to indicate their future revenue possibilities.

In their research - based on the user base at Facebook - Cauwels and Sornette calculated a value for the company based on every user generating $1 profit per year. This is the approximate average each user has made over the last five years for Facebook. This would give the company a valuation in the base case of $15 billion, in the high growth case of $20 billion and in the extreme growth case of $33 billion. Others have valued the company at anywhere from $65 billion to around $100 billion.

While some in the media are talking about Mark Zuckerberg's age and the fact he wore a hoodie to Wall Street, others are wondering if the coming Facebook IPO could be another dot com bubble about to burst. The Facebook co-founder has renounced his US citizenship ahead of the IPO as he stands to earn quite a bit of money with the initial public offering. For those who want to read more about the valuation of Facebook, Quis pendit ipsa pretia: facebook valuation and diagnostic of a bubble based on nonlinear demographic dynamics is a worthy read.