If you believe the rumor mill, social media giant Facebook should file for its initial public offering of stock, or IPO, today. Values of the 2012 IPO vary, with IFR reporting Tuesday that the price tag will be $5 billion in new stock, while previous estimates had the benchmark closer to $6 billion last week and as much as $10 billion months ago.
Needless to say, there are a lot of unknowns — how the user experience will change, how profitable Facebook really is and, of course, how Mark Zuckerberg and company will spend the mountains of money they rake in from a stock sale.
But one thing is for sure: This could be the most hyped IPO in recent memory. And that enthusiasm could be bad for investors who try to get a piece of Facebook.
Facebook has grown from an online diversion to a vital part of modern communications since its birth in Zuckerberg’s dorm room some eight years ago. According to media reports, the market value of the company will range between $75 billion and $100 billion after its IPO. The $10 billion raised from public investors will theoretically go toward increasing the reach and scope of Facebook’s services — with hints that some type of journalistic foray is on the way, judging by the purchase of the domains that are variations on the phrase “Facebook newsroom.”
Consumers and Facebook junkies know the appeal already. You see pictures of the grandkids or old college roommates. You get news from your favorite sources. You get special deals, play games and more.
But investors need to be wary here. The question isn’t whether Facebook is fun, but whether it is profitable.
In September, eMarketer estimated Facebook’s 2011 revenue at $4.27 billion, more than double 2010. But such a figure is irrelevant without details on costs. After all, General Motors (NYSE:GM) managed to rake in tens of billions in revenue but still go bankrupt; profits are what really matter. CNBC reported last week that “the company’s expected to earn about $3.8 billion in 2011 full-year revenue and roughly $1.5 billion in operating profits.” But that’s just speculation, and ZDNet questioned those numbers but still figures Facebook is profitable.
A long way of saying that all this hype about Facebook’s IPO comes amid great uncertainty over whether it actually turns a significant profit.
What’s even more disconcerting for investors is that Facebook is the hottest ticket in town, talked up by some folks who don’t understand the nature of IPOs or the stock market, and that has pushed pricing sky-high. Mark Hulbert estimates that Facebook’s stock offering will be priced nearly 40 times above the average large-scale IPO of the last 40 years.
That’s saying something, considering that despite Facebook’s mammoth $5 billion price tag it won’t even crack the top 10 largest IPOs in history.
Even more disturbing are echoes of the tech bubble from 10 years ago. Social media companies like LinkedIn (NYSE:LNKD), Renren (NASDAQ:RENN) and Pandora (NYSE:P) rushed to the IPO scene in the last year to capitalize on the buzz created by a Facebook offering and general enthusiasm for all things social. Many flamed out spectacularly after the facts of their rather disappointing operations came to light — but now these companies are rallying on little news, simply by virtue of being in the same sector as Facebook.
So to summarize, we have a company that has questionable profitability but a nosebleed valuation — and the optimism over its IPO has lifted the entire sector without discretion.
Sounds an awful lot like the dot-com bubble, if you ask me.
We’ll have to wait to get the specifics on the Facebook IPO later today (or later this week, if the rumors prove false). Important things to look for include its balance sheet, its offer price and its actual public offering date.
But in the meantime, investors should read reports with a healthy dose of cynicism.
Until there is hard evidence Facebook is as good at making money as it is at killing worker productivity at the office, Wall Street would be wise to temper its enthusiasm.
Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace???.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.