For more than a year there has been rampant speculation about a Facebook IPO, and now one is finally on the way.
According to a report in The Wall Street Journal, Facebook is looking at a deal that would value the company between $75 billion and $100 billion, WSJ reported, making it one of the biggest in U.S. history.
Facebook is looking to raise as much as $10 billion, which would make it the fourth-largest U.S. IPO behind Visa Inc. (NYSE: V), General Motors Co. (NYSE: GM), and AT&T Wireless. A $100 billion valuation would make Facebook worth as much as global powerhouse McDonald's Corp. (NYSE: MCD).
WSJ reported Morgan Stanley (NYSE: MS) would be the lead underwriter, a job that could give the firm more than $500 million in fees. [But that $500 million could lose 90% of its value if this government practice is allowed to continue. Major financial companies won't be the only ones threatened, either. This will hit everyone's investments - and could devour a huge chunk out of your retirement account. Take a look at our latest free report right here for details.]
A strong performance by Facebook could test the idea that social media companies are overhyped. But before you get excited about Facebook shattering that theory, you'd do well to look at some of the other hot tech IPOs of the past year.
Can the Facebook IPO Standout from Tech Flops?
A series of tech IPO disappointments in the past year has fueled speculation of another dot-com bubble.
Online music provider Pandora Media Inc. (NYSE: P) is down more than 30% since its IPO last year. Business networking site LinkedIn Corp. (NYSE: LNKD) is down 14% from its listing price, and daily deal site Groupon Inc. (Nasdaq: GRPN), has plunged 27% since its debut only a few months ago.
Most recently, a strong debut by online gamer Zynga Inc. (Nasdaq: ZNGA) flopped. It fell nearly 14% the same day it IPOed. The company has posted a slight rebound since but is still performing below its lofty expectations.
The question investors have to ask themselves is: What makes Facebook different?
After all, it is the most trafficked website in the world, but its business model leaves a lot to be desired.
"One out of every 12 people in the world visits the popular social networking site, and the collection of human data that's stored there makes Facebook the largest, self-fueled marketing database in human history. That point is well taken," said Money Morning Chief Investment Strategist Keith Fitz-Gerald said "But exactly what is Facebook going to do with all of that data?"
Furthermore, Mark Zuckerberg, the young genius behind the company will be challenged to manage a global company whose financial performance will be scrutinized every three months by investors. And Facebook still faces concerns about users' privacy.
Yet the company's planned $10 billion offer would value the social network between $75 billion to $100 billion, said people familiar with the matter.
Popularity vs. Potential
"This appraisal highlights Facebook's popularity, not its earnings potential," said Fitz-Gerald. "Facebook may have jumped ahead of Google as the most visited website in 2010. But it's not worth $100 billion."
Fitz-Gerald points out that Google Inc. (Nasdaq: GOOG) made $3.26 billion in revenue in its first year public (2004), but it had valid, often user-driven sales opportunities.
Google's advertising targets, through its search engine, at least, are often looking to be "sold" when they go to the site. Whereas, Facebook users don't want their chatting/gaming/posting time consumed by invasive or even passive salesmanship.
Said Fitz-Gerald: "Sure, Facebook has a lot of people trolling through its site. But the important question is: How do they monetize that traffic? In other words, they face the same old dilemma salesmen have faced since the beginning of time: How do you convert the "tire-kickers' into buyers."
If Zuckerberg can turn his site into an advertising gold mine, the potential for the company could be endless.
IPO Shares Reserved for Elite
But even if the company can monetize its popularity, regular users won't be able to get into its IPO.
Instead, Facebook's IPO shares will be reserved for the wealthiest investors, not the loyal users who have fueled Zuckerberg's rise to riches.
Before Facebook, Zuckererg was just a college student....
Today, Zuckerberg's net worth is $17.5 billion and he's ranked No. 52 on the Forbes list of billionaires - No. 22 in the United States - and No. 9 on the Forbes list of powerful people.
"Zuckerberg made history with Facebook - and now he's the king of social media and social networking - the man with the Midas touch," said Money Morning Capital Waves Strategist Shah Gilani. "But now it's time for him to give some of the gold that he's earned as the head of Facebook back to the people who helped make that happen. They're the ones who have brought his company to the forefront. They're the ones who should be participating in this."
So, how could Zuckerberg use the Facebook IPO to give back to those who've helped him become an Internet legend?
Gilani has a plan for that...
The Facebook IPO Lottery
Gilani suggests Zuckerberg reserve a portion of the IPO for Facebook subscribers - since they're the folks who really made him the king of social networking (as well as one of the youngest billionaires in history).
Giving Facebook subscribers access to shares at the offering price would actually be simpler than it might seem, Gilani insisted. In his plan, Facebook could reserve 20% of the IPO shares for Facebook subscribers, and then dole those shares out via a lottery.
"I think the shares of Facebook are going to be highly coveted in the IPO realm, and I think there's going to be worldwide demand for it," Gilani told Varney. "So the investment bankers, the underwriters, are going to parcel those shares out as they normally do to their favorite elite clientele that they want to support."
Given that the Facebook IPO is likely to be one of the hottest ever, Gilani said that his proposal would probably be the only way the average investor could get a piece of the company at the offering price.
Without such a reserve, retail investors who really want to own Facebook shares will be forced to buy on the secondary market after Facebook's share price has experienced what's expected to be a stratospheric zoom.
Zuckerberg's Second Act
"Facebook was Act One for him," said Gilani. "This kind of pioneering move with the Facebook IPO could be Act Two - the encore. If social media is a force for good, this would be Zuckerberg's opportunity to once again prove he's a real social innovator."
And altruism doesn't have to be the sole motivation for Zuckerberg, either.
The company's most ardent subscribers are likely to be deeply loyal shareholders, too - especially those who get into the Facebook IPO via the lottery. Those folks will probably view the shares as more of a badge of honor than an investment, and will be loath to dump them during tough times. And that will help put a floor under Facebook's stock price, Gilani insists.
"Most of these people are very likely to hold onto their shares - recognizing that they're part of the social-networking group that broke historic new ground," Gilani said. "Zuckerberg will see that it's just good business."
Gilani said such a move would show Zuckerberg truly believes in the social networking trend he's helped evolve.
For more investing ideas from Shah Gilani and Keith Fitz-Gerald, take a look at our latest special presentation. It shows you how to get $26,000-worth of our best investing ideas. And it's free to new Money Morning readers like you. Just go here.