Facebook IPO Blows Up the Internet

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Facebook (NASDAQ:FB) raised $16 billion for its original stockholders and investors in the biggest initial public offering by an Internet company in history, with shares priced at the top end of a range that was increased once. It’s the third-largest public offering in the history of the country, behind just General Motors (NYSE:GM) and Visa (NYSE:V).

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At a price of $38 per share, the total current valuation of the company is $104 billion, higher than McDonald’s (NYSE:MCD), Citigroup (NYSE:C), and Amazon.com (NASDAQ:AMZN), among others.

A total of 421.2 million shares were finally put up for selling on Thursday afternoon, 25 percent more than originally planned. The company finally priced shares at the topmost possible end of its two earlier calculated ranges—first setting the range at $28 to $35 a share, and then raising it $34 to $38 as investor interest grew.

Company executives, including founder Mark Zuckerberg, were on a two-week roadshow leading up to the IPO, with potential investors lining up to hear the pitches. The tour was hugely successful, with its bankers, led by Morgan Stanley, JPMorgan Chase, and Goldman Sachs now expecting to sell a total of 63.2 million shares. Peter Thiel, one of Zuckerberg’s first backers, has also more doubled the number of shares that he is offering for sale to 16.8 million shares.

While the undoubted popularity of the company’s social network has heightened interest and trading, set to begin on Friday morning, is expected to be voracious, Facebook does face a few questions. At the $38-a-share valuation of $104 billion, the company, which brought in $1 billion in net income last year, is selling at 100 times trailing earnings. Compare that to Google and Apple, which were selling shares at approximately 24 times and 13 times trailing earnings, respectively.

There are questions also about Facebook’s growth prospects and its plans to sustain momentum at a website where revenue has grown 24 times from 2007 to 2011. First-quarter profits fell to $205 million in the first quarter of the year as sales growth slowed and marketing costs zoomed up. Sales are expected to rise 64 percent to $6.1 billion in full fiscal, but that would represent the third straight year of slowed growth.

Despite its 900 million-and-growing user base, ad sales have not grown as fast for a company where 85 percent of the revenue comes from advertising. Earlier this week, automaker General Motors announced it would pull its paid advertisements off Facebook as they weren’t bringing in enough returns. Facebook is also struggling to adapt both technological innovation and advertising to mobile devices.

However, GM did decide to keep up its on-site brand pages on the website, which clearly points to the importance of that massive user base that is Facebook’s biggest asset. As the hype of its hugely successful IPO slows in the coming months, the biggest challenge for the social network would be to come up with brand strategies as brilliant as the website’s origin had been.

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