Apple co-founder Steve Wozniak recently told Bloomberg Television: “I would invest in Facebook.... I don’t care what the opening price is.”
That's fine for him to say. He's got lots of cash, and maybe this tech visionary has some good insight on how this IPO will play out. But in general, enthusiastic investors often get burned by taking a great-company-at-any-price view.
Facebook is a great company, in terms of its brand recognition and the massive customer base it has gained since its 2004 founding. To give a sense of its rapid growth, Facebook's revenues, at $3.7 billion, were nearly five times larger in 2011 than they were just two years before.
But the price matters, too. The offering-price range suggests that Facebook will be valued by investors at about 150 times one year's earnings, and at about 25 times annual sales. Both those ratios are extraordinarily high, even for a popular and fast-growing technology firm.
When you buy a share of stock, you're buying ownership of a stream of potential revenues and profits, and you're calculating that that stake will rise in value. Facebook would have to do very well to justify its expected market value. And that's before even counting the price jump that may happen before small investors get a chance to buy.
Maybe the company will execute well. The potential for big earnings growth is certainly there. But financial analyst Henry Blodget flagged a couple of concerns Monday on Yahoo's "Daily Ticker."
Facebook's growth rate is decelerating, "and its profit margins have probably peaked," Mr. Blodget writes. Another challenge, he says, is the increasing share of Facebook activity happening over mobile devices. Ad revenue tends to be smaller in the mobile arena than on traditional computers.
Using data from the firm's stock prospectus, Facebook's revenue grew in 2011 at half the pace of a year earlier, but by a still-strong 88 percent.
If you want a list of other risks the company faces in pursuing its business plan, one good place to start is the company's own stock-offering prospectus, pages 12 through 34. (Every company has to enumerate such risks, so don't let the list automatically scare you off. But read it and ponder.)
