Facebook IPO Valuation, Stock Performance, and Investment Analysis

Facebook's IPO Valuation and Market Capitalization

The valuation 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 earlier 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 its products.

The company had reported a net income of $1 billion in 2011, up 65% year-over-year, indicating that it was on a strong trajectory toward profitability. With 845 million monthly active users and 483 million daily active users, it was positioned as a compelling advertising platform. Its market capitalization, however, was a staggering $104 billion at the time of the IPO — a price-to-earnings (P/E) ratio 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 assessment may have led early investors to sell the stock soon after the IPO, which could explain the share price's plunge in the following months to $17.55. The stock quickly rebounded, however, and steadily rose as positive news emerged from headquarters annually. Today, its market capitalization stands at $496.47 billion. The pricing errors might have been minimized by evaluating external factors alongside internal factors, such as a yield-starved marketplace.

Supply, Demand, and the IPO Pricing Mechanism

The Facebook IPO was also shaped by the dynamics of supply and demand — specifically, the number of shares sold to the public and the level of public demand for those shares. The public was keenly aware of how cheaply it could have purchased shares of Google at its IPO price, and Facebook was widely regarded as the next great 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 price of $38 per share on May 18, 2012, and 421,233,615 shares offered, the $16.007 billion raised made it the largest tech IPO in U.S. history at the time. Immediately following the offering, the share price dipped — but an investor who purchased shares at that price would be holding a ten-bagger today, as the company's stock valuation has increased roughly tenfold over the subsequent five years.

References

Cauwels, P., & Sornette, D. (2012). Quis pendit ipsa pretia: Facebook valuation and diagnostic of a bubble based on nonlinear demographic dynamics. Journal of Portfolio Management, 38(2), 56–66.

Cusumano, M. (2012). Reflecting on the Facebook IPO. Communications of the ACM, 55(10), 20–23.

Gajic, N., & Budinski-Petkovic, L. (2013). Ups and downs of economic and econophysics — Facebook forecast. Physica A: Statistical Mechanics and its Applications, 392(1), 208–214.

Krigman, L., & Jeffus, W. (2016). IPO pricing as a function of your investment bank's past mistakes: The case of Facebook. Journal of Corporate Finance, 38, 335–344.

Modis, T. (2002). Forecasting the growth of complexity and change. Technological Forecasting and Social Change, 69(4), 377–404.