Facebook & Wall Street : The Emperor's New Clothes
After the Goldman Sachs private issue, Facebook stocks have skyrocketed. It was valued at $82.9 billion at private exchange Sharespost Inc. at the time of its regulatory filing for a $5 billion IPO last week. As per reports the valuation of its stock could go as high as $100 billion seeing the clout of its bankers and underwriters Morgan Stanley, J.P. Morgan Chase, Goldman Sachs, Meryl Lynch and Barclays Capital.
That would be higher than internet retailer Amazon, auto major Ford Motors, sports good manufacturer Nike, Pharma company Abbot Laboratories, and many more some of which have a hundred year track record and revenues and assets worth billions of dollars. Facebook reported revenues of $3.71 billion in 2011 and a net profit of just $1 billion by comparison with assets worth even lesser.
So as far as the Wall Street Banker’s are concerned the Facebook under-writing decision is a risk free win-win deal. Though the valuation is sky high the net exposure to banks will not be more than $5 billion. There has been sufficient hype around the IPO to draw in gullible investors and global money bags to invest. Goldman Sachs had whetted the investor appetite earlier and set the tone with a $2 billion private placement to overseas investors pushing up the valuation to $50 billion. Now the IPO with the backing of half a dozen Wall Street Banks is expected to further increase the valuation which looks highly probable.
The risk lies solely with the investor after the IPO in absence of regulatory checks and balances. Will Facebook shares be able to hold on to the high pricing at the stock exchanges? As per a Reuters report there are several risks that are associated with the Facebook issue. Its growth is tapering off in the mature markets of North America with 3% rise in users during the December 2011 quarter, much lower than the 7% growth last quarter. Its revenue per user is low at less than $5 and with declining growth , the future does not look as prospective as the past.
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