Trying to figure out how much an IPO prospect like Facebook is worth based on its registration statement can be more challenging than managing the social network friends you’ve accumulated over the years.
Estimates about the company’s worth have centered around $75 billion-$100 billion in recent weeks. But last Wednesday’s S-1 filing offered some detail about how the company itself thought the market might value it recently.
In the filing, Facebook valued its Class B common stock at $29.73 a share as of Dec. 31. That price was based on calculations that relied heavily on secondary market trading by investors who had access to the company’s historical financial information. Facebook noted a “significant volume” of third-party sales of its private stock in December.
In other words, Facebook relied on what knowledgeable investors were willing to pay, as well as its cash-flow projections and the value of comparable companies.
Facebook also said it calculated ownership percentages of principal and selling stockholders as of Dec. 31 based on 1.76 billion shares of Class B common stock and 117 million shares of Class A common stock outstanding as of that date. Class B converts to Class A on a one-to-one basis. The only difference is that Class B has super-voting rights–10 votes per share compared with one per share for Class A.
That, however, doesn’t take into account stock options and restricted stock issued to employees. Another table in the filing includes these along with the average number of shares of Class A and B stock outstanding during 2011 as part of calculation of Facebook’s pro-forma diluted earnings per share.
The total number of shares in that table, including conversion of all Class B to Class A stock, is 2.33 billion. Using the $29.73 share price gives Facebook a value of $69.3 billion.
CEO Mark Zuckerberg holds 28.4 % of the Series B stock plus voting rights over enough other shares of Class A and B stock owned by others to give him 56.9% of the company’s voting power prior to an IPO.
At $29.73 per share, Zuckerberg’s stake was worth $15.9 billion, not bad for a 27 year old.
Accel Partners, the venture investor that stands to gain the most, holds an 11.4% Class B stake worth about $6 billion. And it reportedly sold some of its shares earlier to realize gains. The Palo Alto, Calif., firm led a $12.7 million financing for the social network in 2005 and participated in a $25 million round the following year.
DST Global, which invested several years later, holds Class A and B stock worth $3.9 million. Early investor Peter Thiel of Founders Fund holds Class B stock worth $1.3 billion. Goldman Sachs, which engineered a $1.5 billion infusion into Facebook about a year ago, holds Class A stock worth $2 billion.
Most other investors’ holdings don’t even show up in the SEC filing because their stakes are too small. That includes early investors Greylock Partners and Meritech Capital Partners.
Of course all Facebook investors are hoping that the buzz around the offering and the company’s rapid growth will yield a significantly higher IPO price when its stock hits the public market in a few months, perhaps valuing the company at $100 billion or more. But that remains to be seen.
COMMENTARY: I have intermittently tracked Facebook's share prices ever since they started trading shares on secondary market brokers like SharesPost and SecondMarket. Sales are on the auction basis in traunches of 25,000 to 50,000 shares at a time. Facebook share prices have tended to range between a low of $32.10 to a high of $33.91. Share prices actually dipped below $30.00 per share in mid-November and some analysts thought Facebook had lost its steam.
On January 30, 2012, SharesPost reported that Facebook stock rose to $35.50 a share, hitting an implied valuation of $83.5 billion, up from the $80 billion valuation implied during the the January 20, 2012 auction.
On February 3, 2012, two days after Facebook's IPO filing, SharesPost reported that Facebook stock surged to $40 a share, in an auction in which 100,000 shares traded hands. The fact that the auction closed so high is mind-blowing. The result is an implied valuation of roughly $94 billion, just under the high end of Facebooks rumored IPO valuation range ($75 billin to $100 billion). Also, this is far higher than the $35 price reached in SharesPost trading on July 19, 2007 after which it dipped.
On February 8, 2012, SharesPost, reported that it had completed an auction of 150,000 shares of the Class B Common Stock of Facebook, Inc. on February 8, 2012 at a clearing price of $44.00 per share was established at the auction.
This brings Facebook’s implied valuation to a whopping $103.4 billion.That’s well above the rumored upper end of the Facebook IPO valuation.
Facebook Trading Volume and Shares Prices - June 6, 2011 through February 6, 2012 - SharesPost
Now that the IPO is on the horizon, it seems like investors are trying to snap up whatever shares they can in the social media company, expecting a continuation of the trend in which IPO trading surges above pre-IPO SharesPost trading (as was the case with the LinkedIn IPO).
This raises questions regarding what is driving all this euphoria and stampede for Pre-IPO Facebook shares:
- Who are the individuals who are selling?
- Do they just want early liquidity, even though the big moment is only months away?
- Do they suspect an IPO that won’t deliver?
There seems to be little consensus on Facebook’s trading future beyond an expected early spike at IPO. So, let the guessing-games begin!
In Facebook's S-1, they used a calculated a share price of $29.73 which is close to the lowend of shares bidded in the secondary market, so I felt comfortable with the S-1 valuation. However, judging from the three SharesPost auctions listed above, the IPO hype and investor euphoria is at an all-time high if investors are willing to forkup $44.00 per share for Facebook stock.
What Facebook will actually price their IPO shares, and how many shares will be floated, remains to be determined. Just how much of a pop Facebook shares are likely to get on IPO day will depend on what Facebook's shares are selling on the secondary market. That price is now $44.00 per share, and could go higher between now and May 2012, the scheduled IPO month. This computes to a P/E ratio of 102 based a fully-diluted EPS of $0.43 as of December 31, 2011. Is this realistic, when Google's P/E is 20.53, Apple's P/E is 14.04?
What could've changed in just eight days? By Facebook's own valuation estimates, its shares are only worth $29.73. That's a spike of 48% above Facebook's estimated price of $29.73. This is all based on secondary market hype, investor euphoria and the belief that Facebook is worth more. If investors are willing to pay $44.00 per share today, can you imagine what they might pay on the IPO day?
A lot of things are likely to happen between now and the IPO day sometime in May. We will have to see if today's public social media stock prices hold up, the state of the world economy, Eurozone sovereign debt problems and the state of the U.S. economy. There's also the possibility of Israel attacking Iran. We may also go through another stock market decline like the one we experienced between July and September 2011.
Facebook listed nearly fifty investor risk factors in its IPO filing, so investors beware. I just don't see a 48% pop from the opening IPO price of $30.00 (my guess), but they could come out at $44.00 based on the recent trades in the secondary market.
Folks, this is how bubbles are made. When the Facebook Halo Effect has the share prices of publicly-traded social media companies increasing without any explanation other than the Facebook IPO filing, there is something definitely bubbling. Could Facebook be the catalyst that triggers the next Tech Bubble?
Courtesy of an article dated February 7, 2012 appearing in The Wall Street Journal's Venture Capigtal Dispatch and an article dated February 8, 2012 appearing in InsideIPO.com
Comments