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JPMorgan Chase & Co
The ranks of the One Percent are about to get bigger. Facebook is seeking to raise $5 billion in one of the tech world’s most anticipated initial public offerings, according to a Feb. 1 regulatory filing. The sale may value Facebook at as much as $100 billion, or about 100 times its 2011 net income. At that level, the company would trade at 26.9 times 2011 sales. Search engine operator Google (GOOG) now trades at about five times sales.
Mark Zuckerberg, who started Facebook in his Harvard University dorm room in 2004, owns 533.8 million shares, or 28.4 percent of the social network, according to the filing. If the company is valued at $100 billion, his stake would be worth $28.4 billion. Co-founder Dustin Moskovitz, whose work on the company was depicted in the Oscar-winning 2010 film The Social Network, owns 133.8 million shares, or 7.6 percent. Chief Operating Officer Sheryl Sandberg owns 1.9 million shares, or 0.1 percent. She also holds 39.3 million restricted stock units. Peter Thiel, who provided a seed investment for Zuckerberg in 2004, owns 44.7 million shares, or 2.5 percent.
Fast-growing companies’ price-to-earnings ratios often start high and gradually fall. Google, which at its 2004 IPO was valued at 121 times the previous 12 months’ earnings, now trades at about 20 times. “The $100 billion valuation that’s being tossed around just puts it at a level we’ve never seen,” says Jeffrey Sica, chief investment officer of Morristown (N.J.)-based Sica Wealth Management. “They have to be able to show that not only do they deserve to be at that level, but they have multiple channels to create new revenue.”
Sales at Facebook surged 88 percent, to $3.71 billion, in 2011, according to the filing. Net income in that period jumped 65 percent, to $1 billion. Facebook’s revenue may rise to between $6.5 billion and $6.9 billion this year, researcher EMarketer estimates.
The site, which has amassed more than 845 million users, makes money by selling ads to companies that want to reach that growing base. The Menlo Park (Calif.) company wrested the lead in U.S. online display ads from Yahoo! (YHOO) in 2011, taking a 16.3 percent share. Industrywide, EMarketer says, spending in the U.S. online display ad market may surge 20 percent this year.
To capture those ad dollars, Facebook will have to find ways to continue to engage users. U.S. visitors to Facebook in December spent an average of seven hours on the service during the month, a 32 percent increase from the previous year, according to Reston (Va.) researcher ComScore (SCOR). Visitors spent about 4.5 hours on Google’s sites during the month and even less on Yahoo’s. Facebook’s “greatest challenge obviously is keeping the advertising momentum because advertising is their key source of revenue,” says Debra Aho Williamson, an EMarketer analyst.
Google, one of Facebook’s main competitors in Web advertising, raised $1.9 billion in its IP0, giving the company a market value of about $23 billion, or about 10 times sales in the 12 months through June 30, 2004. Today the Mountain View (Calif.) company is valued at more than $180 billion, making it the most valuable Internet property.
Facebook’s filing lists potential risk factors: The company gets 12 percent of its revenue from Zynga (ZNGA), the biggest developer of Facebook games, including FarmVille and Mafia Wars. Facebook also cited potential competition from Google, hacker attacks, regulatory scrutiny, and the shift to mobile technology.
Morgan Stanley (MS) won the coveted lead underwriting assignment on the deal, a coup for the bank and Michael Grimes, its global co-head of technology investment banking. A Morgan Stanley spokesman declined to comment. Grimes, with Morgan Stanley since 1995, may have benefited from ties to Facebook’s Sandberg, who was a senior executive at Google at the time of its IPO; Morgan Stanley led that deal. Last year the bank also led Internet offerings from Zynga, Groupon (GRPN), and LinkedIn (LNKD). Goldman Sachs (GS), listed third after JPMorgan Chase (JPM) in the regulatory filing, had difficulties handling a private sale of Facebook’s stock to U.S. investors a year ago. A Goldman Sachs spokesman declined to comment. The bank halted the offering in the U.S. after the deal drew “intense media attention,” it said at the time.
The bottom line: With an estimated $100 billion value, Facebook’s IPO will make Zuckerberg, who has 533.8 million shares, one of the richest people in the world.