Status Update: Facebook IPO
The much anticipated Facebook IPO looks like it is just around the corner and it appears that Morgan Stanley is going to be the lead underwriter. Reports indicate that the filing could happen as early as this Wednesday. Valuation is a cool $75B – $100B and the IPO is expected to raise a total of $10B. Goldman was the frontrunner as they arranged a $1.5B private offering for the company in January 2011, but due to an error on their end the investment was available to non-US investors only. The largest technology related IPO was Infineon Technologies which occurred in 2000 for a total of $5.9B. Google’s IPO was the 3rd highest internet IPO with $1.9B offering in 2004. Please click on the following link as it illustrates internet stocks in a graphical manner: http://on.wsj.com/A0JyHO . With over 800M users worldwide Facebook is basically valuing each user at $125.
While Facebook is a powerful social media force, there is a feeling that they have grown out of touch with their users. Their new service, Timeline, is being forced onto users which is cause for concern. To be frank I think Timeline is only going to benefit insurance companies, spying on their policy holders in order to catch them on technicalities. It is however comforting to note that Facebook does pay attention to environmental causes. Most internet companies have a dark side in that their server farms use copious amounts of energy for cooling purposes. Historically these farms have been located in California where the average ambient temperature is high. With growing pressure and costs associated with cooling, companies such as Facebook are moving their server farms to countries such as Finland. Facebook and Greenpeace were at war with each other in early 2011 as 700,000 users joined a campaign to encourage better energy consumption. As a result Facebook changed their data center policy and now it states “a preference for access to clean and renewable energy supply”. Alas this statement is vague and does not provide specifics as to how. It should state something more concrete like Facebook will use at least 20% of its energy from renewable sources. We do however need to give credit to Facebook as they launched a new Open Compute Initiative that encourages the sharing of engineering information pertaining to the design and construction of energy efficient server farms.
There will be a lot of discussion over the next several weeks as Facebook releases their financial results. Markets are somewhat skeptical after Groupon used questionable accounting practices in an IPO attempt last year. While I am not suggesting that Facebook will have this issue, they will need to maximize earnings as much as possible. Using renewable energy is an easy way for companies such as Facebook to improve their margins and I suspect that this is the main reason for the change of heart. Regardless, from the information available to date I believe that Facebook is overvalued at this time and IPO investors will wish that the Timeline function actually allowed them to time travel.
Written by: Sam Perera, Financial Savant