Facebook Ipo

As a fast-growing company, Facebook(FB) have completely changed our life. From Exhibit 1 we can see that until 2011, Facebook have 845 million monthly active users. At the end of 2011, Facebook increases 65% of the net income up to 1 billion dollars and 88% of the total revenue up to 3.7 billion dollars. It seems like that everyone would not want to miss this great opportunity to buy into this great technology company.

But as an investor, I would not recommend buying into Facebook. There are several reasons we need to focus on.

Firstly, I think the main problem is overvaluation. If the opening share price is $35-40$, the valuation of Facebook would be over 100 billion dollars. As mentioned before, Facebook has net income for $1 billion and total revenue for $3.7 billion, so this valuation is too high for Facebook.

Secondly, because people use APP more than the web to use the Facebook, most of its revenues is advertising, which is a decrease from 98 percent to 85 percent (2009-2011). With the popular of using the smart phone’s APP, this problem seems like Facebook could not solve in the short period.

Thirdly, it is about dual-class share structure. Class A share is entitled to one share while class B is entitled to 10 votes, which means that Zuckerberg totally controls the Facebook. This would lead to some problems like transactions are not supported by other stockholders. Just like purchasing Instagram, we have to admit that it is a great move in the Facebook’s history, but we can guarantee that Zuckberger would not make a mistake in the future.

Lastly, the global economic environment is improving but still fragile. Unemployment rate stay high over 8 percent in the USA; NASDAQ and S&P index is decreasing at the May of 2012; the number of IPOs and its capital raised are both decreasing (From exhibit 4 and 5). The recent IPO including Groupon