There has been a lot of attention about Facebook due to their record breaking initial public offering (IPO) this year. Watching this all unfold has made me think quite extensively about what this means for the future of our economy and the global capital markets. As we have witnessed many times in recent years their are certain triggers in the capital markets that highlight disparities and serve as indicators to future results. I believe the Facebook IPO is one of those moments in history. First off, I would like to state that Facebook was valued at $104 billion dollars when their IPO hit the market. Everyone knows this is a massive number but what does it really mean?
I believe taking one simple metric will put all of this into perspective. Many analysts use price per share to earnings ratio (P/E) as a quick indicator of a companies value in the market. Facebook’s current revenue is $1 billion which makes their P/E ratio 104. To put this in perspective, Apple’s current P/E ratio is 14.77. Facebook is the largest IPO in history and also the biggest bet in public market history. All those that bought Facebook stock believe that Facebook is going to grow at unparalleled rates during the next five to seven years. What caused this type of confidence in a company?
As many of you know I have thought that Facebook was overvalued in the secondary markets and grossly over valued in the IPO. That is beside the point, what I am most interested in is why this valuation was created and supported in the institutional investors and individuals. Also, what does this say about the current markets and the future of our economy. Facebook will need to double profits for several years in order to justify their current valuation and many investors have confidence that Facebook can do that. However, are we not forgetting one important fact – Facebook currently has no presence in the second largest economy in the world – China! How does a company spur unprecedented growth without including the second largest economy in the world and over one billion people.
At the core of me I am optimist but this seems completely illogical to me in many ways. I am mainly writing this blog not to state opinion but to state this historic event as a major turning point in the capital markets and to create conversation on what this type of bet means for the future. Will social media be the white knight that comes and saves our economy or the desperate last bet placed in hope of recovering losses? I do not know the answers to this but anxiously monitor this important bet with great interest in hope that the individuals and institutions that make up the capital markets learn from this historic event.