Capitalization

Facebook: Ready for Its Big S&P 500 Debut


Citizen Kane, meet Mark Zuckerberg.

Zuckerberg, Facebook’s (FB) founder and chief executive officer, recently shelled out more than $30 million to annex four homes that neighbor his Palo Alto (Calif.) manse. While the new billionaire on the block may or may not go full Hearst Castle, it is clear he’s in the market for some of what the late Warren Zevon called splendid isolation.

As fate wills it, Zuckerberg’s Facebook, with its $120 billion market value, will soon almost certainly be imposing itself on the Standard & Poor’s 500-stock index, a $16 trillion neighborhood lined with insurers, industrials, and old-guard media conglomerates. The young media mogul’s social network is now worth more than S&P members Home Depot (HD) and Goldman Sachs (GS); two Time Warners (TWX) (think HBO, Lord of the Rings, TNT, Conan O’Brien, Anderson Cooper’s blue-blooded coif) make one Facebook. Barely a year and a half after its ill-starred initial public offering and a decade after Zuckerberg’s eyes first glimmered in his Harvard dorm, Facebook already ranks as the 29th-biggest stock by market value; it would be the largest company to be added to the S&P 500 since Berkshire Hathaway (BRK/A) was called up in January 2010.

Shares are up 85 percent this year on four straight quarters of positive net income. Portfolio managers may blanch at Facebook’s high valuation—it trades at almost 12 times next year’s estimated revenue. But funds that track or hug the benchmark ($5.1 trillion now follows the S&P 500), will have to clench their teeth and pay up, potentially creating a melt-up in the stock. Credit Suisse portfolio strategist Stephen Casciano estimates that index funds would need to snap up 190 million shares of the company once it’s added. An S&P spokesman says the company doesn’t speculate on changes to the benchmark “as a matter of firm policy.”

“Inclusion in a major index would significantly broaden Facebook’s investor base, providing added liquidity and price support, and the addition would likely cause a near-term pop in the share price,” wrote veteran Internet analyst Jordan Rohan in a June research report. The company’s market cap has since doubled.

Google (GOOG), now the market’s third-most-valuable company, joined the S&P 18 months after its August 2004 IPO. Superimposing that timeline on Facebook means it will get beamed up by mid-month. It has already satisfied the prerequisites of market cap, consistency of profitability, trading for at least six months after its debut, and having enough of its shares available to the public. Amazon (AMZN), EBay (EBAY), Yahoo (YHOO), Priceline (PCLN), and even Expedia (EXPE) are already members.

Meanwhile, welcome to the dot-com reunion tour. Stay a while and look around. Fifteen years ago, the parent of dying five-and-dimer Woolworth’s was ousted from the S&P 500, which swapped in AOL (AOL), then worth $40 billion. Within one exuberant year, that figure swelled to $222 billion, an ephemeral currency that founder and CEO Steve Case was prescient enough to spend before it vanished. Within days, he would strike up what was then the largest merger in corporate history—also, it turned out for the acquired, Time Warner, the worst.

So don’t be surprised if a mostly paper-rich Mark Zuckerberg soon annexes more neighboring estates, metaphorically speaking.

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Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.

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Companies Mentioned

  • FB
    (Facebook Inc)
    • $72.57 USD
    • -0.08
    • -0.11%
  • HD
    (Home Depot Inc/The)
    • $80.37 USD
    • -0.48
    • -0.6%
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