One of the most talked about companies right now is Facebook. Their impending IPO is set to raise five billion dollars in capital. The initial brokering lead has been hired out to Morgan Stanley which will market the stock to high end clients that aren’t in the finance field. These clients, doctors and lawyers, like brand recognition. So there is only marginal concern that Facebook will not raise its target of five billion dollars. However, there is a lot speculation about whether or not Facebook’s stock is a sound long term investment. Although there is no foolproof way of predicting the way a stock will perform, we can look at how similar companies have fared. Two companies that have attributes similar to Facebook that have gone through an IPO are Zynga and LinkedIn. Facebook should take a cue from the way these companies.
Zynga is a gaming platform that partnered with Facebook. This company is the creator of such household names as Farmville…and Farmville. On December 16th, 2011, they had their initial public offering starting off at 10 dollars a share. Within 15 minutes of trading, the price had fallen to 9.50. In the past year, their stock value has fallen to as low as 7.97 dollars a share. However, at the time of this writing it was trading at 13.89 a share. It seems that at first, investors didn’t know what to make of this tech company and people fear what they don’t understand. Zynga’s many revenue streams come from the monetization of their games. Now, some might say that selling consumers a tractor in Farmville isn’t really, but it’s as real as an app sale for Apple. Zynga had a rocky start, but it seems to have stabilized.
LinkedIn, unlike Zynga, started its IPO at 45 dollars a share and ended the day at 94.25. It hasn’t been all champagne for LinkedIn. After an IPO there a locked-up period in which insiders, people who owned stock before the IPO, can’t sell their shares. When the 180 day period ended there was a selling frenzy. Stock value fell to 70 dollars a share. As of March 9th, 2010, LinkedIn was trading at 90.13.
Facebook probably has one thing that sets it apart from LinkedIn or Zynga. They are valued at about 8.9 billion and 7 billion respectively. Facebook is said to be worth more than ten times that at 100 billion. With that much value comes a lot of scrutiny. In 2011, its total revenue was reported at 3.7 billion dollars. What kind of company is worth 27 times its yearly income? That question alone may cause its IPO to go the way of Zynga. On the other hand, Facebook reported that it has 2.2 billion dollar data center operation. The IT services alone for such facilities is staggering feat. Investors can see that that’s a lot of data, personal data. Is the data of 845 million users worth 100 billion dollars? Maybe. If investors feel that Facebook is on the level, their stock may soar. However, a significant amount of stock is held by insiders. For example, artist David Choe was given stock as payment for painting murals at the origin Facebook office. If all holds up, Choe’s shares could be worth 500 million dollars. Imagine 500 million in shares just dumped on the market along with all the other insiders all at once.
Facebook’s IPO may be a rock star or flop. It has many expectations to meet. LinkedIn and Zynga have shown two paths that Facebook may take depending on how investors perceive it. Or if Burton G. Malkiel, author of A Random Walk Down Wall Street, is to be believed then it might all be up to chance.