It seems as though almost everyone wants a piece of the Facebook IPO. The social networking giant is set to come public this Friday in what will be one of the most highly watched initial public offerings of a lifetime. The price range was lifted to $34 to $38 per share with a value of roughly $100 billion. With potentially even more shares being sold by holders now, it is time to ask about what some of the risks are in this huge IPO. The deal was already oversubscribed with more than a week to go, and the order books are already said to be full.
Most investors and watchers are focused on how large Facebook is and how big its opportunities are in the future. There may be a side of caution with a super-premium valuation at the IPO here. 24/7 Wall St. wants to at least run up some of the less obvious flags of caution which investors should at least consider on the risk side before throwing their life savings into the social networking leader.
Leadership is a huge risk here… Facebook is effectively going to be controlled by 28-year old Mark Zuckerberg. He will hold or have the ability to control approximately 57% of the voting power of the outstanding capital stock following this offering. The fact that Zuckerberg’s ‘hoodie’ stood out in the IPO roadshow more than anything else may bring some caution. Zuckerberg also apparently gets to appoint a successor, making this somewhat like a kingdom rather than a public company.
NO real voting power for holders… Facebook has this dual-class of shares. This gives what is effectively zero power to common shareholders. Shares of the Class A common stock are entitled to one vote per share while shares of Class B common stock are entitled to ten votes per share. This is another example of a public company that might as well not even hold annual shareholder meetings.
Google hype versus Facebook hype… The last big frenzy of this sort that comes to mind is Google Inc. (NASDAQ: GOOG). Facebook will already be worth half of what Google is worth today, yet Google is expected to generate almost $35.5 billion in sales in 2012. If you just annualize the first quarter Facebook revenues with 10% growth sequentially in each quarter, the Facebook revenues would come to about $4.9 billion in 2012.
Sequential revenue growth has already faltered… We just noted the revenue path if Facebook grows revenues 10% sequentially each quarter, but the reality is that in the first quarter of 2012 the social media giant saw negative sequential revenue trends. Facebook generated revenues of $1.06 billion versus $731 million a year earlier and net income attributable to shareholders was listed as $137 million versus $153 million. Facebook saw its first sequential decline in revenues as the fourth quarter of 2011 had combined revenues of $1.131 billion. Despite seasonality, the growth opportunity here is so large that the company should still be growing sequentially at this point.