Facebook shares up, but value down by a third: Ready for the IPO?

Facebook looks like its worth close to $10 billion right now, based on actual transactions in the stock. The social networking site has seen its shares surge on an exchange for private companies, suggesting that the company is perceived to be headed in the right direction. Of course, private companies don't have to disclose all their dirty laundry, so assume that the current "market" value is based on only the rosiest of impressions. Some see this as a leading indicator of a Facebook IPO, which is bound to ignite unparalleled excitement.

There's room for a little common sense, though, and investors should take advantage of it. Facebook remains down 33% from its 2007 peak value of $15 billion, and the recent trading activity implies a value slightly below that defined by the latest investment in the company. It probably makes sense to keep the corks in the champagne bottles a little bit longer, but only because the vintage isn't quite right yet.

Share Price Surges, Exits Sought

Since July, shares of Facebook on SecondMarket -- a New York-based exchange that allows Facebook employees to liquidate their pre-IPO holdings -- have jumped from $14.77 to around $21. The 42% spike in only four months is largely attributed to the rapid growth of its user base and the company becoming cash flow positive. At $21 a share (for common stock), Facebook has a market value of $9.5 billion.

SecondMarket has handled around a dozen Facebook share transactions over the past two months, and since the end of last year, the marketplace has moved $75 million in Facebook stock sales. The most recent, which occurred last week. SharesPost, a service similar to SecondMarket, is seeing action edge upward for Facebook shares, as well. Though the most recent transaction it completed was in August, involving $15,000 shares at only $12 a piece, the latest ask price is $20, up 35% over the past three months.

The sales don't necessarily indicate a vote of "no confidence" in Facebook. For many, the sales are simply diversification plays. According to Tom Kim in Bloomberg News, an attorney specializing in executive compensation, "People are holding shares in Twitter or in Facebook and they want to unload some of the shares, maybe even 50 percent of what they own." He continues, "They don't need 5 million shares."

The sales could also mean that the shareholders are looking for some liquidity. Since many employees at Facebook and companies like it are attracted by equity compensation and often sacrifice some cash for it, having to wait a while can make it necessary (or at least enticing) to cash out a bit.

Trading at a Discount?

It's easy to get caught up in the excitement of a 42% gain, even if it's only on paper, but the situation isn't nearly as optimistic when you follow the flow of actual money. Compared to recent investments in the company, Facebook's private stock exchange performance is actually below expectations. The gap has narrowed over the past four months, with the $9.5 billion market value only slight behind the $10 billion implied by the most recent infusion, but it's hardly cause for excitement.

In 2007, Microsoft (MSFT) sent the value of the social networking site into the stratosphere, with an investment that propelled the company to a $15 million valuation. Since then, the excitement has abated, with a $200 million round in July 2009 by Digital Sky Technologies pegging Facebook's value at $10 billion. On SecondMarket, the company is valued at $9.5 billion, which is slightly behind the Digital Sky valuation.

It's easy to be a pessimist when you look from the top down, but there's plenty of room for optimism. Back in July, Digital Sky offered to put $100 million into Facebook at a price that would result in a $6.5 billion value. At that point, private exchange trading valued the company at that amount, with a share price of $14.77.

Relative to milestone venture investments, employees are selling cheap, but there's no exact science to finding the right exit point before the company goes public. Facebook is keeping its lips sealed on plenty of the data you'd want to use to enter or exit a position in the company, but it has projected $500 million in revenue for 2009, with no indication as to profit margins. So, it's hard to tell by either measure -- recent major investment or financial performance -- whether recent Facebook sale prices are positive.

IPO Rumors . . . Still

The activity in Facebook stock is really just foreplay for the big event that every tech sector investor can't wait to see: an IPO. Facebook's debut is expected to light the world on fire and is expected to remind us of Google's (GOOG) entry into public capital markets.

With more than 300 million users, the Facebook has a near-dominant position and is far ahead of its competitors (Twitter, also white-hot, is far behind with only around 50 million users), and the site is already being measured against the search engine giant, to which it is starting to be called a competitive threat. The stars are lining up for Facebook, even if it's only because that's what the excitement in the sector demands, which means IPO rumors will only grow louder.

Renaissance Capital LLC believes that Facebook may go public in the next 12 to 18 months. Analyst Paul Bard says, "The fact that the stock on these private exchanges moved -- I'm sure that has to do with the fact that people think a deal is coming sooner rather than later."

Yet, not all are in agreement. Lise Buyer, founder of IPO advisory firm Class V Group, who helped execute the Google IPO, believes that the recent liquidity opportunity for employees means that an IPO is not imminent. Mark Zuckerberg, Facebook's CEO, says that he expects to take the company public, but he isn't focused on it.

For now, it's a game of wait and speculate. There's no cure for curiosity in the near term, which leaves Silicon Valley sideliners holding their sealed champagne bottles. The right year will come soon enough, however, and will be followed by the pop we're all waiting to hear.

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