The Facebook IPO and What it Means to the Future of the Capital Markets

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.

NPR Planet Money: Facebook, Whats Next?


1 comment

  1. Hello Dusty,

    Please forgive me for my English, it is not my mother tongue, thus
    grammar is not my forte 🙁


    I absolutely agree with you about Facebook’s hype. I have a different opinion though. It is not about markets, it is about product itself.

    To me, Facebook is like Microsoft, one has to go to school to learn how to navigate through hundreds of unnecessary features, which constantly change. That is why, Microsoft is loosing market share on all their products – search engine, office products, web server software, internet main stream language and so forth.


    China – first and formost, Facebook can not enter that market, just like Google and others..

    Do not forget that People’s republic of China is an extremely intellegent and sophysticated society with an oldest history, which helped them to be who they are now..

    China is a society which:

    a) Made the entire world dependent on them.

    b) Were the ones who introduced a new health care aproach.
    you pay doctor to stay healthy. if you get sick, doctor will treat you for free.
    Think about this concept!

    c) The first country in the world to realize that freedom and democracy on the internet does not work! Internet access MUST be sensored by government, and also it must be tied to individual who can be traced via government issued ID.

    Countries which do not understand this, will regret in about 3-5 years. I am sure folks from CIA, FBI, Police and other agencies would absolutely agree with me!

    If you do not agree with me, research one of many underground internet worlds

    Here you will find things like: child pornography, drugs for sale, stolen credit cards for sale and so forth.


    Russia just recently passed the law to start regulating internet..


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