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Before You Get Excited About the Facebook IPO...

By , Associate Editor, Money Morning •

For more than a year there has been rampant speculation about a Facebook IPO, and now it finally appears as though one is on the way.

The social media giant could file papers for an initial public offering as soon as Wednesday, according to a report from The Wall Street Journal. The company is looking at a deal that would value the social media giant between $75 billion and $100 billion, the WSJ reported, making it one of the biggest in U.S. history.

Scott Sweet of IPO Boutique told MarketWatch a Facebook IPO will likely lead to "pandemonium."

"It's absolutely massive," Sweet said in an interview. "The mere drop of a hint will cause pandemonium."

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).

The WSJ reported Morgan Stanley (NYSE: MS) would be the lead underwriter, a job that could give the firm tens of millions in fees.

A strong performance by Facebook when it starts trading 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 20% since it listed in June of last year. Business networking site LinkedIn Corp. (NYSE: LNKD) is down more than 18% from where it listed in May, and daily deal site Groupon Inc. (Nasdaq: GRPN), has plunged 23% since its November debut.

Most recently, strong debut by online gamer Zynga Inc. (Nasdaq: ZNGA) flopped in December. 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 it 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 is currently looking at a deal that would value the social network between $75 billion to $100 billion, said people familiar with the matter.

"This appraisal highlights Facebook's popularity, not its earnings potential," said Fitz-Gerald. "Facebook may have jumped ahead of Google as the most visited Web site 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."

Zuckerberg and company need to answer these questions soon with the Facebook IPO on the brink of reality.

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