So much has been written of Facebook’s IPO in the last two weeks that I contemplated whether I should share my point of view as well. Of course I should! What are blogs for?
1. Vast majority of financial press deemed it one of the worst IPOs in history. That’s a very narrow perspective. The IPO was bad for one segment only: Wall-Street insiders and speculators who thought they would buy pre-IPO stock and flip it on its first day spike. From the company’s perspective, the IPO was a major success: they managed to raise billion of dollars more than initially planned, at a valuation that now seems far-fetched (I started writing this post when the stock was at $32, it is now trading at $29).
2. When a company’s stock is rising sharply on its first day, it mainly means one thing: the bankers under-priced it, hurting the company and favoring insiders and underwriters.
3. When the stock crashes so bad soon after the IPO, it usually means one thing: the bankers over-priced it and screwed themselves and their best customers. Either way, the banks are big losers in this IPO.
4. When asked about Facebook’s IPO, Warren Buffet said:
“The idea that something coming out…that’s being offered with significant commissions, all kinds of publicity, the seller electing the time to sell, is going to be the best single investment that I can make in the world among thousands of choices is mathematically impossible”
His 88-year old (read: sees fewer funny cats videos than the average FB user) partner Munger added:
“I don’t invest in what I don’t understand. And I don’t want to understand Facebook”
How much is Facebook worth? It is currently trading at a valuation of $62B and a 75 earnings multiplier, down from IPO valuation of $104B. Can you make an argument it’s worth $100B? Probably. Can you make an argument it’s worth ‘only’ $50B? Sure you can.
As Buffet said, there is just no real way to value that beast. Does it even matter if FB is worth $50B or $100B? Not really, it’s still an amazing giant that grew out of nowhere virtually overnight.
5. Will I buy Facebook’s stock at $29 / share? No. Microsoft is trading at P/E 11; Google is trading at P/E 18. Facebook has to quadruple its profits to trade at levels similar to Google. Can they do that? Maybe. Can they do that within the next 2-3 years? probably not.
6 (bonus). Mazal Tov to Mark Zuckerberg for getting married on IPO weekend (in a very humble wedding, I must add). Love is way more important than stock price.
I came across this very interesting presentation published yesterday, which explains why Facebook is still the perfect startup.