Facebook IPO: An Event We Have All Been Waiting For

On May 3rd, Facebook Inc. announced that the price of its stocks intends to be between $28 and $35, valuing the company between $77 billion and $96 billion. This week the roadshow must be started, and later in May we'll see the biggest IPO in the history of tech companies. After the rise in the beginning of this year, the markets remained quite weak for two months. Maybe this IPO will be able to boost them.

But aside from the possible rise of markets, is an IPO of Facebook with such a great valuation a good or a bad thing? As usually, opinions differ.

In fact, Facebook IPO is quite unique even for the tech sector, or at least it's unusual for the companies of its size. Unlike many other companies that have eventually become giant, Facebook is already very large. When Google went public in 2004 it was already quite famous, but its value has increased ten time since then. And it was the biggest tech IPO in history at that moment. Even if Facebook will go public with $77 billion valuation, it is nearly impossible to imagine that it can grow ten times - then it will cost more that Apple today.

So, it seems that the potential of the future growth is very limited there, and it has always been the main incentive to buy tech companies' stocks. What can Facebook suggest as an alternative? Only great revenues and large dividends in the future. But there is one problem - with present revenues, Facebook's Price to Earnings Ratio will be higher that 50x in any case. And while many companies in tech sector have higher multipliers (LinkedIn, for example, has P/E at level of 900x), all of them are way smaller that Facebook. Of course, the revenues of Facebook have been growing steadily for years, but it can by no means guarantee that the growth will continue. In fact, the last report concerning revenue for the first quarter of 2012 is even disturbing - Facebook seems to begin to spend much more on marketing, and while the revenues continue to grow, net income is less than a year ago. After we have all seen Groupon, which stocks have lost more than 50% of the price since the public offering because of its ineffective business model, large expenses on marketing seem definitely disturbing.

Nevertheless, it is obvious that Facebook IPO will draw a lot of attention, and the price of the stocks is likely to soar after the public offering. Facebook is by no means similar to GroupOn today, and it can be a good investment. It just seems that you need to find an answer to the question "What If Facebook Isn’t So Special After All?" raised in Businessweek a month ago, before investing.