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GOING PUBLIC

Inside Facebook's S-1: What Investors Are Saying

We dug into the IPO filing. Is Facebook really worth $100 billion? What does it mean for capital markets? Is the social network just managing expectations?
Mark Zuckerberg, the CEO and founder of Facebook, stands to become the world's richest 20-something after his company's IPO.
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Well, it's official: Facebook is on the road to going public. This evening, the company filed its long-anticipated S-1 form that details the company's revenue, its user base, how much the company hopes to raise, and hundreds of other financial details.

Here's a brief run-down of the need-to-know financials:

  • The company is seeking to raise $5 billion
  • Company revenue in 2011 was $3.711 billion, compared to $1.974 billion in 2010
  • Net income was $1 billion 2011, compared to $606 million in 2010
  • There are 845 million monthly users and 483 million daily users
  • 85 percent of company revenue came from advertising; in 2010, 95 percent was advertising
  • Mark Zuckerberg owns 28.4 percent of Facebook

"Facebook was not originally created to be a company," writes the company's founder and CEO, Mark Zuckerberg, in the introductory S-1 letter. "It was built to accomplish a social mission—to make the world more open and connected. We think it's important that everyone who invests in Facebook understands what this mission means to us, how we make decisions and why we do the things we do."

Reena Aggarwal, a finance professor at Georgetown and the director of the Center for Financial Markets and Policy, says there were some noteworthy—and unique—elements of Facebook's S-1.

"It has to be one of the smallest floats ever," says Aggarwal, referring to the $5 billion the company seeks to raise. Earlier today, some had predicted a raise of up to $10 billion. "I am surprised that it is only a $5 billion offering. It suggests to me that they needed to do the IPO partly because they were hitting the 500 shareholder regulatory bump. It's a lot of work for a relatively small offering. If the valuation is $100 billion then the float will only be five percent—much lower than typical IPOs."

There's almost four billion dollars sitting in cash, Aggarwal notes. "This shows the company didn't need to go public because it needed money tomorrow."

Jeffrey Sica, principal of Sica Wealth Management, an asset management firm with $1 billion in client asset, is happy the company decided to go with the relatively modest float.

"The revenue number is in line with what I expected," Sica says "If they were to raise more than $5 billion and attain a higher valuation, the revenue number would set up very high expectations for investors. They have to show they can execute, and manage expectations so people don't come in to this and knock the cover off the ball right away."

If expectations are too high, he says, investors can get let down easily.

There were other notable factors, as well.

Aggarwal also points out that the IPO lock-up period—which is usually about 180 days, and indicates how soon investors can sell off stock—is in this case set for 90 days. She also notes that the company is issuing two types of stock, A and B. Stock B, in this case comes with voting rights, though it might not have much effect for stock holders.

"In a way, it doesn't matter because Zuckerberg controls everything," she said.

Still, investors such as Sica are wary that the $83.5 billion valuation might be too high.

"I think so much of that has been built in as a result of the hype around it," says Sica. "They have these 800 million users which is impressive by any measure. The problem with valuation itself is they need to justify ways they're going to take these 800 million users and extract more revenue from them than they've been able to. The valuation is astronomical."

In its filing, the company plans to expand revenue partially by increasing advertising rates due to "improvements in ability to deliver more relevant ads" and "product changes to deliver higher interaction."

There's at least one more significant concern looming large for investors. Specifically, how Mark Zuckerberg—age 27—will fare as the CEO of a massive public company.

"He's definitely brilliant and creative and everything you'd want in that position," Sica says. "But there's such high expectations. It's like someone who plays youth football and is compared with Tom Brady. It just doesn't make sense."

While investors will peruse through the S-1 with a fine-toothed comb—particularly after Groupon's IPO gaffe earlier this year—some experts are looking big picture: The Facebook IPO is the perhaps the best illustration of how the tech market has evolved and matured, as well as its role within capital markets.

"We are expecting 2012 to be a year of recovery for the IPO market led by the Facebook IPO," Kathleen Smith, principal of IPO investment adviser Renaissance Capital wrote in an e-mail to Inc.com. "So far in 2012, the FTSE Renaissance US IPO Index has run up 10.1 percent, more than double the 4.4 percent return on the S&P 500.  This is a good sign for the historically large backlog of companies in line to go public."




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