Life After The Facebook IPO
Six plus years. Two books. One movie. Millions of pages of press coverage. Hundreds of millions of dollars in private funding. Trillions upon trillions of bytes of data. Almost a billion users worldwide. More than $2bn in revenues. The hype cycle redefined. And, now, it’s all over. Facebook’s raising $16 billion with a peak value more than $100billion makes it the largest venture-backed IPO and the third largest US IPO ever, seventh world-wide. Facebook missed the top spot in terms of money raised by less than two billion, but it crushed that number one IPO, Visa, in overall market cap.Facebook’s offering also dwarfs Google’s. The pioneer of the click marketplace raised 1/10 less money, a mere $1.67 billion, at one-quarter of the valuation, $24bn.
Something about the Facebook situation reminds us of Microsoft’s attempt to buy Yahoo. It was one of those monster moves that could shake up the interactive space. It was a drama that was on a grand scale. If, when, and how Facebook would IPO has captivated a far wider audience than Microsoft and Yahoo ever could, because it’s a company that so many users know. It’s also the type of IPO that happens so infrequently. All the drama, the amazing valuation jumps through the year, and what did we get? Arguably a let down. Then again, it is hard to get it right. LinkedIn jumped so massively on its opening day that it had people crying foul. Others stagnated and have never really gained traction. Zynga is trading at half its high. Millennium Media as well. Groupon is 60% off its peak. Yelp. Pandora. The list goes on. Only LinkedIn is still trading way above its initial offering. Unfortunately, it’s being valued at multiples that have us, the lay person, confused.
As for Facebook, it came out of the gate at $42, above the already top end $38 price. Since then, it fell to $31 and has for the moment stabilized in the low $30’s, still below the $34 lower end of the pricing. No one seems to know what it will do, especially given the likelihood of the company reporting lackluster numbers for its first time as a public company. With the hype having died and an emphasis on performance, it’s a new world for Facebook. One that all of a sudden starts to look less about how they might change the web and more about how they put money in the bank. Speaking of money in the bank, even after its investors cashed out, the company has billions in the bank and billions more of paper money that it can use. Google waited, but when it started buying, it went big, shocking the world in 2006 with its 1.65 billion dollar purchase of cash-burning, trademark infringing video site YouTube. Today, the move seems prescient, but it took countless additional billions and amazing execution to get the business where it is today. YouTube could have very well been Google’s MSN.
Facebook will start buying companies. It won’t have two years before making a big bet, though. Other easy predictions include the absolute impossibility the company will match Google’s post IPO revenue and profit growth. Famed NYU finance professor Aswath Damodaran explained in a guest article on Forbes.com, “If the company can maintain a compounded revenue growth of 40% for the next 5 years, with growth rates scaling down after that towards the growth rate of the economy, the firm will have revenues of $44 billion in ten years, which would put it on the same growth path as Google in its first years as a public company.” He continues saying, “I think a discussion centered on growth, profitability and the cost of growth is not only a healthy one but one that we should be having about all young, growth companies.” Too bad this view is not how humans operate. We live by momentum not reason. Professor Damodaran summarizes this perfectly when adding that “the investment bankers spent the bulk of the last week surveying investors, trying to get a sense of what they would pay, rather than assessing what Facebook was worth.”
Thinking about Facebook has us thinking again about the JOBS Act, a focus of another article in this week’s edition. Throughout the run-up in Facebook, we kept feeling like the system is broken. Facebook the public company came out at $100 billion. How much more upside is there? Apple’s stock is up 418% in the last five years, up 600% since its low in 2009. Investors have benefited enormously from the company’s growth. For Facebook to do this, it would mean them being worth more than Apple. That doesn’t seem too likely. The JOBS Act, though, wouldn’t have allowed investors to get in earlier. It would have allowed Facebook to stay private longer, though. Perhaps that makes it a safer investment when public, but it wouldn’t have made the upside any better. Nor does it help those who would love to support Twitter and any number of companies that will go public at the upper end of their value curve.
Perhaps, though, the belief that the regular investor should be allowed to participate earlier is a flawed belief. It is no doubt perpetuated by the option crazy world that tech companies helped create. For the counter to this, we look at SC Johnson, “a family company.” They are the owners of some of the best known household brands – Pledge, Ziplock, the scrubbing bubbles. They earn more than $10bn per year (5x Facebook’s revenues). We can buy their products, but we can’t buy their stock. You can imagine the uproar the Johnson’s would have were there a rule that said a company has to go public after a certain size. So why do we feel so entitled in the reverse when a company we know well goes public and keeps control in the hands of its founder? There is an answer between the two extremes, or so we hope to keep our faith in the markets alive.
