The three big questions about Facebook's IPO
The three big questions about Facebook's stock exchange launch are: (1) Is it worth all the excitement? (2) Has the market got the valuation right? (3) What is Facebook going to spend the money on? Here are the answers I've been giving, most recently on air on the English-language Voice of Russia radio station.
(1) Is it worth all the excitement?
A resounding yes, for three reasons. First, this is by far the biggest technology IPO of all time, with the $38 share price valuing Facebook at $104 billion. That's not chump change. Second, Facebook going public marks a shift in the technology landscape from the search era, dominated by Google, to the social networking area, dominated by Facebook. This is like a regime change. Third, Facebook co-founder Mark Zuckerberg is, like Steve Jobs and Bill Gates, a character, and we all love stories about characters. The nerd in the hoodie has already been the subject of a major movie, The Social Network, and he attracts the sort of media attention that Google's Larry Page and Sergey Brin could only dream about.
(2) Has the market got the valuation right?
I think most people will agree that the market has got the valuation completely wrong: there's no way Facebook can be worth $104 billion on its current numbers. But really, you're buying the future. At the moment, Facebook only makes about $4.34 per user per year, which is much less than the $30 a year or so that Google makes. However, it's not hard to imagine Facebook doubling its income per user, or in a few years, quadrupling it. If Facebook can do that -- and it's far from certain that it can -- then the current price will look like a good deal.
(3) What is Facebook going to spend the money on?
There's a long tradition of technology companies piling up cash in the bank, as Microsoft and Apple have done, and I think Facebook will try to hang on to its (roughly) $18 billion of new cash. It probably will take over some small companies but, as with Instagram, I expect it will try to use shares rather than cash. It is also investing heavily in infrastructure to make sure its pages load as quickly as possible, and supporting a billion active users -- the next target -- doesn't come cheap.
Many of us think that we're currently in technology Bubble 2.0, with some companies going for silly valuations, and it may turn out that Facebook becomes the poster boy for investors' irrational overexuberance. But this is a long game. It will be at least three years before we can get a real perspective on Facebook's share price, and even that won't be the last word. As Apple and IBM have shown recently, technology share prices can go up as well as down.
Thanks to presenter Tom Hedegard from the London-based Voice of Russia for asking the original questions.