What Happened to Facebook's 2011 IPO? (And Should You Buy It in 2012?)

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Facebook IPOWith an estimated $100 billion market cap, Facebook's initial public offering was supposed to be the biggest deal of 2011 -- the biggest Internet IPO ever, in fact. For an entire year we waited for it to happen, but no matter how many times pundits tried to slap a date on the IPO, Facebook managed to dodge it.

So, what the heck happened to the Facebook IPO?

The pundits' latest guess is that an IPO will happen sometime this spring. But really, the date's not the most important question. The most important question is: When Facebook finally does go public, should you buy it?

Numbers, Numbers, Everywhere

A recent leak of Facebook's financials for the first nine months of 2011 -- revealed recently on Gawker.com by way of a "source with knowledge of Facebook's finances" -- gives us a few clues. Taking these numbers, and projecting them out through year-end, here's what we find:

2011
Revenue
$3.33 billion
Net Profit
$952 million
Cash and Cash Equivalents
$3.5 billion
Debt
Zilch

Now, leave aside the caveat that these numbers are unverified and unverifiable. Assuming they're true, what do they mean? Here are a few interpretations:

  • Amazingly for a "virtual company," Facebook's $3.33 billion in annual revenues mean that it does more business in a year than Groupon (GRPN), LinkedIn (LNKD), Zynga (ZNGA), Zillow (Z), and Pandora (P) -- the five most-hyped Internet IPOs of 2011 ... combined.
  • Even more surprising, in 2011 Facebook somehow collected $11 in revenues for every man, woman, and child in the country -- despite not charging its customers a penny for its services
  • It also earned good profits off these revenues. While the five companies named above were busy losing a combined $650 million last year, Facebook earned nearly a billion dollars.
  • Perhaps even more incredible, Facebook's profits work out to a 28.6% "net" profit margin for the company. That's better money than Google (GOOG) makes, and it's at least four times better than the profit margins made at "real" companies like Ford (F) or General Motors (GM).

Facebook Doesn't Even Need to IPO

Of course, the most interesting thing these numbers tell us about Facebook and its IPO is that Facebook doesn't need to IPO at all.

Just take a gander at Facebook's bank account -- sitting on $3.5 billion already, and without a lick of debt, Facebook is not your typical IPO candidate. Generally speaking, companies that go the IPO route do so for one of three reasons:

  • To raise cash to pay down debt.
  • To raise cash to fund or expand operations, so they don't have to get into debt in the first place.
  • To help company insiders (venture capitalists, employees, and founders) cash out of the company, and raise some cash for themselves.

It seems that what we're looking at here is a "Door No. 3" situation. Facebook is giving you a chance to cash in on its success because its current owners are looking for a payday.

If Insiders Want Out, Why Should You Want In?

Of course, we won't know for sure who exactly is looking to cash in on the Facebook IPO until the company files its IPO prospectus. Founder Mark Zuckerberg owns a good 24%, while Facebook's other employees are said to own a further 30% of the company. Chances are, when this IPO happens, it's going to mint more than a few millionaires.

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So, should you help out with that? Should you, to put it plainly, buy the Facebook IPO?

If Facebook debuts at $100 billion as expected, the company would sport some pretty eye-popping numbers post-IPO. A 105 price-to-earnings ratio, for one thing. (Google only costs 22 times earnings.) On the other hand, if unverified, unverifiable numbers can be relied upon, Facebook's earnings this year will be double what it earned in 2010, which was in turn double what it earned the year before that.

Numbers like these get an investor to thinking: 105 times earnings, divided by a growth rate that seems perfectly capable of hitting 100% growth year after year (at least, for two years ...) works out to an almost perfect 1.0 "PEG ratio" -- the value investor's metric for a fairly priced stock.

And that's perhaps the most surprising revelation of all about the Facebook IPO. Even at a $100 billion valuation, this stock just might be a bargain.

Motley Fool contributor Rich Smith owns shares of the last great Internet IPO: Google. The Motley Fool owns shares of Google and Ford Motor. Motley Fool newsletter services have recommended buying shares of Google, General Motors, Ford Motor, and Zillow. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor.


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