The Great Facebook IPO

Today is the big day. This morning Facebook, the great behemoth led by Mark Zuckerberg, the greatest industrialist of our time, went public.  At a market capitalization of $104 billion (based on the original offering price, which was exceeded immediately and will never be seen again) Facebook is the 23rd largest US company, just edging out Amazon.com.

NYSE-Mod-Small Is anybody buying this hype? Apparently so, as quite a few people seem to be buying the stock.

McDonalds has a market capitalization of $92B as I write this. It has a brand name that is at least as well known and globally ubiquitous as Facebook’s. It has 420,000 employees to Facebook’s 3500. And in the 12 months ending 3/31/12, McDonalds made a profit of $5.56B on revenues of $27.4B. Facebook made $0.65B on $4.04B in revenue.

As any stock market novice knows, the value of a company relative to its profits is a function of the expected future growth of those profits. A fast growing company gets a higher multiple.

So ask yourself: how much faster will Facebook grow than McDonalds? McDonalds home market may be saturated, but it is a big world out there and the golden arches have a pretty good record overseas. Facebook, on the other hand, already has 900 million members. Its growth will be based on finding new ways to “monetize” them. Which I am sure it will do. But still….

I am not being in any way original or even contrarian in pointing out how very questionably expensive Facebook is. In fact, it is hard to find anybody willing to say buying it is a good idea. Even SmartMoney’s RealTime Advice blog’s post entitled The Right Way to Buy Facebook starts by giving a few good reasons not to buy Facebook shares, then concedes that some people are dumb enough to buy lottery tickets, so they will buy Facebook also. It gives some tips on doing it with the sort of resigned tone that you might advise a teenage daughter to stick to beer and wine over mixed drinks.

It is almost too absurd to mock. Well, not quite.

And yet. Facebook did go public at $38 a share just a few minutes ago. The first trade was $42.05. Tens of billion of dollars, all of them hard-earned to somebody, will be used to purchase a share of the Facebook dream today.

The great stock market speculator and modestly accomplished economist Maynard Keynes explained the stock market working like a form of beauty contest then popular in British newspapers. Readers were shown pictures of dozens of young ladies. They were asked to pick their five favorites, with a prize going to the reader who picked the five women most often picked by others. To win the prize, the smart reader would not pick the five he thought most attractive so much as the five he thought others would think most attractive.

And so it is with Facebook. It is a $100B+ company, and, I predict, will stay that way for a while, not because that makes sense to any great number of people, but because quite a few people think it makes sense to quite a few other people. Welcome to the stock market, Mr. Zuckerberg.

UPDATE 4pm 5/18/12: Serves me right for trying to be topical. FB closed very slightly above the offerring price, apparently only keeping above it through the valiant efforts of the underwriting banks that brought it to market to buy back shares. From start to finish the trading day was a fiasco, with NASDAQ only barely able to keep up with the volume. (566 million shares traded, against 413 million taken public.) Consensus seems to be that the IPO was somewhere between a dud and a train wreck. I guess rationality beat out cynical greed, just this once. How disappointing. Still, at $104 billion in market cap, FB is priced at about $115 per user.

No Comments

No comments yet.

RSS feed for comments on this post. TrackBack URI

Leave a comment

WordPress Themes