2/2/2012
By David Urani, Research Analyst

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Congratulations to Facebook, for bursting onto the scene with its IPO filing yesterday. We still don't know when it will make its market debut, but it's sure to be fairly soon. We don't know exactly what its market cap will be yet but the estimate puts it at between $75 billion and $100 billion. That puts Facebook among some very prestigious company. The thing is, where Facebook's market cap differs from other companies in its valuation range is that Facebook's value anticipates some breakneck acceleration in sales and earnings. Granted, in the seven years it's been around its growth has been simply astounding but we thought we'd give you a rundown of where they are now and how they compare with some of the other companies in its $75-100 billion value range:

You might have noticed off the bat the high profile of Facebook's peers. Note that Anheuser-Busch InBev, Citigroup, Cisco, and United Technologies are also in the vicinity. The first thing one might notice is that Facebook's revenue is well below that of the other companies. Facebook has hundreds of millions of users, but only recently really began to derive large amounts of revenue from them. However, as you can see, that revenue is up 88% from 2010 and that is a key component to the Street's valuation. The next thing that is notable is Facebook's large profit margin. 27% of its sales are pulled into net income. That being said, you also have to respect McDonalds, which pulled 20% of its sales into the bottom line last year.

By no means is Facebook on the same scale as the other companies yet, but looking at its ongoing explosion of new users and revenue growth, combined with its high margin operation, it's looking like it can get there over time. Of course its revenue growth rate is sure to decelerate from current speeds but looking at Amazon's 40% growth rate for instance tells you that high growth is attainable over several years, even after revenue hits the tens of billions.

Certainly Facebook has a lot of legwork yet to do to truly reach expectations, but given its initial income figures I believe it can truly establish itself alongside the likes of McDonalds in size and scale in 5 to 10 years as long as it can maintain Amazon-like sales acceleration and McDonalds-like margins. Perhaps one of the big questions I have personally is on the management team. We know Mark Zuckerberg and his team are a bunch of very tech savvy folks, but do they have the leadership to run a $100 billion blue chip enterprise smoothly year after year? I wish them luck.

As far as investing in the stock when it does make its market debut (ticker will be FB by the way), we'd like to see the final valuation first. What I will say is that a lot of the big internet IPO's in the past year like Groupon (GRPN), Pandora (P), LinkedIn (LNKD), and Zynga (ZNGA) saw massive jumps on their trading debuts, only to see precipitous cliff dives in the months following. In fact, among those, only Zynga is trading higher than their trading debut, but not until immediately after the Facebook filing in which it said it gets 12% of its revenue from Zynga. But Zynga did see a cliff dive before that, having traded above $11 in its December debut and fallen to $8 in early January. Other cliff diving internet IPO's include ANGI, RENN, AWAY, YNDX, and FFN.

If you plan on participating in the debut buckle your seatbelt. If you can't catch FB in the first few minutes of trading for a potential initial surge, you might want to wait for it to pull back, if these other e-IPO's are any indication.

David Urani
Wall Street Strategies