It may generate 2.7 billion Likes from users per day, but should you Like their shares? YMM finds out.
You don’t have to be a stock market guru to have heard that Facebook, Inc. is planning to go public on a US stock market (most likely the NASDAQ). It’s expected the $5 billion initial public offering (IPO) – the biggest IPO for a tech company - will launch in May.
In 2011, Facebook announced a profit of US$1bn, up by 40% from 2010. Prior to that, its profit soared by 165% from 2009.
So what prospects does the company have for long-term growth?
It will be difficult for Facebook to keep up with its pace of growth every year, but the growth rate still remains impressive. The success of Facebook ultimately depends on its user base, which it has already largely gathered – the number of users doubled in the past two years, to 845 million people.
“Like many other websites, Facebook currently enjoys the ‘network effect’ where a person will continue to use it because other people are using it,” says Roger Montgomery from Montgomery Investment Management. This competitive advantage will give Facebook a relatively high rate of return on equity.
China remains untapped, and Facebook acknowledged it was unlikely to enter this potentially huge market in its registration statement to the US Securities and Exchange Commission.
Facebook could use all the funds from its IPO to invest in new ways to extract more revenue from current users, or it can simply make acquisitions.
The company’s market capitalisation is proclaimed to lie somewhere between US$75bn and $100 bn. Those figures look glamorous because Facebook is only selling off a small portion of their total shares in the IPO. Montgomery says its underlying value is actually about $27bn to $34bn.
Both Montgomery and Motley Fool Australia’s Bruce Jackson think value investors should stay away from Facebook.
“It’s going to trade at 20 times its revenue. That was the same kind of metrics displayed by tech companies in the first Internet bubble of 2000,” says Montgomery.
Anders Bylund from The Motley Fool (US) said that if investors are really keen to buy a stake, they should wait until the hype surrounding the launch has passed.
“We all know Facebook the service, but Facebook the business' particulars are just getting digested… it’s better to wait until the first quarterly earnings have been released.”
…and from another perspective
So Facebook may not be a smart choice for longer-term investors, but what about CFD investors?
A quick recap: contracts for difference (CFD) are an agreement between the buyer and seller to exchange the difference in the price of a security (such as a share, currency or commodity) between the open and close of the agreement. CFD traders make their moves in shorter time frames, so they aren’t really focused on making long-term gains.
From now until the Facebook’s IPO, CFD provider IG Markets created a ‘grey market’ that allows traders to speculate on how the tech giant will move on its first day of trading.
IG clients have currently tipped Facebook’s market cap to be $117 billion, to incorporate the IPO plus their expectations of the company’s position by the end of the first day of trading. This implies a rally of at least 17% on the first day, making Facebook very attractive for CFD traders.
“If you looked at the launch of similar companies like Groupon and LinkedIn, you’ll find that their price spiked up significantly on their first day of trading”, says IG Markets’ Chris Weston.
-- By Stephanie Hanna
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