Company Valuation The valuation and method used to determine the Initial Public Offering (IPO) value of Facebook stock was based on numerous factors. First, it was a much-hyped IPO, with retail investors seeking to get in on the action that venture capitalists had already secured years prior through private investment. Everything connected in one way or another to Facebook was receiving attention, even Zynga, the one-hit wonder PC-game producer. Second, the company’s worth was measured by clicks and projected ad revenue as well as by the number of users of the company’s products. The company had stated a net income of $1 billion in 2011, up 65% year-over-year, indicating that it was steamrolling to profits. With 845 million monthly active users and 483 million daily active users, it was positioned as a great platform for advertsing. Its market cap, however, was a stagger $104 billion at the time of the IPO (a P/E well above the industry average), which led some analysts to conclude the stock was overvalued and the result of a “new financial bubble” (Gajic, Budinski-Petkovic, 2013, p. 208). This may have led early investors to dump the stock soon after its IPO, which could explain the stock’s plunge in the following months to $17.55. It quickly rebounded though and steadily rose with good news coming annually out of HQ. Today, its market cap sits at $496.47 billion. The pricing errors might have been minimized by evaluating external factors alongside internal factors (such as a yield-starved marketplace).

The Facebook IPO was based on the issue of supply and demand as well—the number of shares being sold to the public and the demand from the public for those shares. The public was very aware of how cheaply it could have purchased shares of Google at its IPO price and Facebook was considered to be the next Internet phenomenon. At the same time, there were plenty of skeptics amid all the speculators seeking to cash in on the next big thing (Cauwels, Sornette, 2012). With an IPO of $38 per share on 18 May 2012 and 421,233,615 shares offered, the $16.007 billion raised made it the biggest tech IPO in U.S. history at the time. Immediately following, the share price dipped—but a buyer of the stock at that price would be holding a ten-bagger today as the stock valuation of the company has increased 10-fold over the past 5 years.

The performance of the stock within the first year of the public offering was depreciation...

Indeed, the IPO market in general felt the underpricing was off “and the average level of underpricing increased from 11% pre-Facebook to 20% post-Facebook” (Krigman, Jeffus, 2016, p. 335). The stock initially declined out of the gate, dropping by half. It then recovered to $24.35 by 31 May 2013, peaking at $31 in January of 2013. The drivers of the performance were questions about the company’s ability to make money, and the resulting impact to the company performance was that it essentially stayed range-bound for the entire first year, never rising above its IPO pricing. Investors were waiting to see how its Q1 would look. When quarterly financials began to be released, investors piled in and never looked back.
An alternative method of valuation for the company and how it may have yielded a different value and the potential resulting impact to investor decisions would have been for the company to consider the fact that social media is not going away—and Facebook is not stuck to the original platform either but also can expand—and that is what it aimed to do with mobile technology and platforms like Instagram. With $1 billion in revenue, prior to its IPO, the company was clearly in line with what Modis (2002) recognized as a growth trend blossoming on social tech. Thus an alternative method of valuation would have been to identify the trend that Facebook was in and was, in fact, setting alongside other social media giants—and how that trend would ultimately kickstart its valuation the way that Amazon and Netflix eventually caught on with investors. Assessing the social trend in this sense would be the key to valuation. The potential resulting impact to investor decisions would be that the investor would rightly spot Facebook as a herald of things to come and buy the stock (preferably on its dips) and accumulate a position gradually but prior to the releasing of financials indicating its ability to truly make a significant profit (Cusumano, 2012).

The role of the Chief Executive Officer (CEO) in relationship to the stock performance is also vital. Facebook CEO Mark Zuckerberg is the face of the company: his story was immortalized on film in David Fincher’s The Social Network in 2010—two years prior to the company’s IPO and a good marketing ploy that helped drum up interest in the stock. Prior to the offering, Zuckerberg made many public appearances and met…