IPOs are exciting. They can give investors a chance to get in on the ground floor of a new venture. They often move 20-30% in one day. And, in the case of Facebook, they can become cultural events—in the news, in the papers, in everyone’s conversation.
But they’re also financial events. And with all financial events, the numbers really matter. The first number of note is the value of the company. Rumors are that they might value the company at $100 billion. That’s 30 times revenue and 100 times earnings. It would take a lot of growth to grow into that sort of valuation.
Facebook claims to have 800 million monthly users and 400 million daily users. With $3.7 billion of sales last year, that’s only $9 / per active user per year. There would seem to be some growth potential there. After all, Google makes about $200 per user. But Facebook isn’t Google. What’s their plan for growth? Selling data? And where is their subscriber base growing fastest (and slowest)?
Beyond the Facebook-specific issues, IPOs themselves can be a mixed bag. For every Google that becomes a six-bagger there seem to be 4 or 5 Pets.com or Webvans that flop. Even household names like Boise-Cascade or Hertz Rent-a-Car can fail.
But managing a public company is hard. It takes a different skill-set than starting or growing a company does. So there’s often a lot of management turnover shortly after an IPO. In addition, hot IPOs are, well, hot. The price soars. Recent offerings like Dunkin Donuts, GM, and Linked-in all declined significantly after the first few days of trading.
Usually, it’s best to wait until the sizzle of smoking IPO wears off and emotions settle down. Only the in the cold light of the numbers should you decide whether you want to take a stake.
Douglas R. Tengdin, CFA
Chief Investment Officer
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