Is Facebook IPO priced too high? The case for and against

Some predict the stock will go through the roof, before "burning" investors. Others say it will be a solid, long-term play.

CEO Mark Zuckerberg sans hoodie.
CEO Mark Zuckerberg sans hoodie.

The hot conjecture this week (and surely next as well) surrounds Facebook’s IPO price. Is it too high?

With a range of $25-35 the top end valuation would be around $96 billion, possible more if the company pushes the price even higher. I read that one analyst refers to the upcoming stock as “muppet bait.” According to a BusinessWeek article, many institutional investors have shied away, and 79% in a poll said the IPO is overvalued. 337 million shares are expected to hit the open market.

Oddly, despite the institutional skepticism, the subscription remains oversold; which makes one wonder if Zuckerberg’s strategy of opening up the stock to lower-end retail (E-Trade for instance) was a sincere effort to include the everyday FB user, or a way to ensure demand would shoot through the roof.

Some predict the stock will skyrocket on the first day (or two) of trading, before “burning” investors. Others say it will be a solid, long-term play. So which is it?

 The case for:

— Facebook is just getting started in mobile (could they launch a phone?) and the ad opportunity is huge

— It has an unassailable lead; upstarts such as Google+ (with the tech set) and Tumblr (with teens) may make small inroads, but no one is likely to catch the juggernaut anytime soon (the Microsoft of the 21st century?)

— Extending its open graph could pave the way for high volume, high margin fees for services such as e-commerce

— Many thought (myself included) that at $85 GOOG was overpriced in 2004 – how did that one turn out?

— The Hoodie

The case against:

— Growth is slowing, sales may climb “just” 64% to $6.1bn this year, the third year of slowing growth (rationally I don’t how we could expect otherwise given the law of large numbers)

— FB is seeking a valuation at 24X revenue; Google sits at 5X

— The market for social network users is saturated. With FB pushing 1B users everyone is already on the network, and international growth is likely to encounter strong local headwinds (try China)

— Facebook currently has a value higher than 90% of the Standard & Poor’s 500 Index.

— Mark Zuckerberg is not “mature” enough to run such a large company (as heard on Wall Street)

— We’re in a tech bubble, and a crash is imminent

Hype alone will likely push the stock up 50-100% on the first day or two, maybe higher over the ensuing weeks. Many will bail, the stock will surely lose its luster, and come back down to earth. The hangover won’t be much fun. Regardless I missed out in Google last decade. It’s a mistake I vowed not to repeat.

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