Company Valuation
The valuation and method used to determine the Initial Public Offering (IPO) value of Facebook stock was based on numerous factors. First, it was a much-hyped IPO, with retail investors seeking to get in on the action that venture capitalists had already secured years prior through private investment. Everything connected in one way or another to Facebook was receiving attention, even Zynga, the one-hit wonder PC-game producer. Second, the company’s worth was measured by clicks and projected ad revenue as well as by the number of users of the company’s products. The company had stated a net income of $1 billion in 2011, up 65% year-over-year, indicating that it was steamrolling to profits. With 845 million monthly active users and 483 million daily active users, it was positioned as a great platform for advertsing. Its market cap, however, was a stagger $104 billion at the time of the IPO (a P/E well above the industry average), which led some analysts to conclude the stock was overvalued and the result of a “new financial bubble” (Gajic, Budinski-Petkovic, 2013, p. 208). This may have led early investors to dump the stock soon after its IPO, which could explain the stock’s plunge in the following months to $17.55. It quickly rebounded though and steadily rose with good news coming annually out of HQ. Today, its market cap sits at $496.47 billion. The pricing errors might have been minimized by evaluating external factors alongside internal factors (such as a yield-starved marketplace).
The Facebook IPO was based on the issue of supply and demand as well—the number of shares being sold to the public and the demand from the public for those shares. The public was very aware of how cheaply it could have purchased shares of Google at its IPO price and Facebook was considered to be the next Internet phenomenon. At the same time, there were plenty of skeptics amid all the speculators seeking to cash in on the next big thing (Cauwels, Sornette, 2012). With an IPO of $38 per share on 18 May 2012 and 421,233,615 shares offered, the $16.007 billion raised made it the biggest tech IPO in U.S. history at the time. Immediately following, the share price dipped—but a buyer of the stock at that price would be holding a ten-bagger today as the stock valuation of the company has increased 10-fold over the past 5 years.
The performance of the stock within the first year of the public offering was depreciation...
References
Cauwels, P., Sornette, D. (2012). Quis pendit ipsa pretia: Facebook valuation and
diagnostic of a bubble based on nonlinear demographic dynamics. Journal of Portfolio Management, 38(2): 56-66.
Cusumano, M. (2012). Reflecting on the Facebook IPO. Communications of the ACM,
55(10): 20-23.
Gajic, N., Budinski-Petkovic, L. (2013). Ups and downs of economic and
econophysics—Facebook forecast. Physica A: Statistical Mechanics and its Applications, 392(1): 208-214.
Krigman, L., Jeffus, W. (2016). IPO pricing as a function of your investment banks’
past mistakes: The case of Facebook. Journal of Corporate Finance, 38: 335-344.
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