Will Facebook (FB) soar like a rocket after its public debut expected next week, mimicking a trajectory that former market megastar Google took in 2004
Or will the "greater fool" theory kick into motion, causing an initial swan dive like other hyped-up issues have taken, such as Chinese Internet phenom Baidu (BIDU - News) in August 2005
Or neither? Instead, will the fast-growing champion in Web-based social networking move sideways, stay in a trading range for months, then follow the general direction of the market
It's impossible to say. What's absolutely true is that over the medium to long term, the stock's success will depend on factors that range from the strength of top- and bottom-line growth to the ability of Facebook's top brass to take risks and stay on the cutting edge.
For now, the dynamics of the stock market will matter a lot.
The offering price that Facebook's underwriters — Goldman Sachs (GS - News), JPMorgan Chase (JPM - News) and Morgan Stanley (MS - News) — ultimately achieve will have a direct impact on the stock's near-term move.
Facebook plans to sell 337.4 million shares at $28 to $35 a share, according to the S-1 filing with the SEC. The high end of the range would raise as much as $13.6 billion before fees, including overallotments of shares.
The higher the ultimate offering price, the better for insiders and venture capitalists planning to sell shares. But if the greater investing public — the thousands of mutual funds, banks, insurers, pension plans and other big market players — judge the price as too rich, the greater the chance of a sudden downward swing.
Consider Baidu (BIDU - News). With a $43 billion market cap today, it's been the most successful Chinese Internet play, and it has enriched investors who know how to analyze chart patterns and buy on proper breakouts.
But in the early innings, the stock flopped fast. After the initial offering was priced at 27 a share, it roared as high as 153.98 before closing at 122.54 on its first day of Nasdaq trade on Aug. 5, 2005. Then it slid 41% the next two weeks.
At its opening-day peak, using 2005 earnings per share, Baidu's P-E ratio exceeded 500.
Baidu tried to form a narrow cup base but never broke out. By early February 2006, the stock sank to 44.44, 71% off its peak.
With an estimated 2.14 billion common shares outstanding, the market value of Facebook, even before shares spill onto the Nasdaq, will instantly make it a large cap ($75 billion) that could quickly grow to megacap status.
This is in sharp contrast to, say, Home Depot (HD - News), which began its legendary stock market journey in September 1981 with a market capitalization well less than $100 million. Home Depot's market value today? $76 billion.
Without question, Facebook is going public with beefier results.
According to SEC filings, Facebook's net income soared from $229 million in 2009 to $1 billion in 2011, good for a 109% annualized growth rate. Revenue shot up from $777 million to $3.71 billion over the same period, a 119% growth rate.
Those numbers compare well with Google's (GOOG - News) pre-IPO numbers. From 2001 to 2003, the king of Internet search boosted net income at a 289% compounded rate and revenue 312% (from $86 million to $1.47 billion).
However, Facebook recently reported a 9% decline in Q1 profit to 10 cents a share. Revenue grew 45% to $1.06 billion, the smallest increase in years.
Tech industry veterans acknowledge Facebook's rare ability to revolutionize markets, particularly in advertising, marketing and games. They see a long runway for growth as Facebook seeks to offer more business services and build relationships with large enterprise customers.
But in the long term, the company's ability to keep a spirit of risk taking will be critical.
Phil McKinney, former chief technology officer of the $40 billion personal systems group at Hewlett-Packard (HPQ - News) and author of "Beyond the Obvious: Killer Questions That Spark Game-Changing Innovation," says Facebook must figure out what its business model is going to be in overseas markets, where social customs and views over personal information and privacy differ greatly from the U.S. And that's not all. "The key is can you create a long-term culture and mindset where innovation plays a core part of long-term growth," McKinney told IBD. "Bill (Hewlett) and Dave (Packard) would take risks. But as more CEOs arrive, the risk profile changes. The word on the street is that Facebook doesn't shy away from experimenting.
Post-IPO traders should also consider this: The media hype couldn't be hotter.
Fortune put CEO Mark Zuckerberg blowing a huge gum bubble on its July 25, 2011, issue titled "TECH BUBBLE 2.0.
Eight months later, Fortune featured the firm on its cover again with the headline "Inside Facebook: How Does the Social Media Giant Really Work? Read This Story Before You Buy the Stock.
Last month's cover of Fast Company magazine offered two headlines: "American Idol: An Intimate Portrait of the World's Most Famous CEO" and "What You Don't Know About Facebook.
That sort of fawning coverage typically occurs at the end of a great stock's run, not the beginning. Yet Google raised nearly $2 billion in August 2004 amid months of intense media scrutiny over its Dutch auction of distributing shares.
It broke out of a narrow IPO base a month later and nearly doubled in eight weeks, en route to a peak gain of nearly 800%.
by Investor's Business Daily May 10, 2012
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