On the eve of Facebook's anticipated initial public offering, is it worth investing in the company that revolutionized the way we connect online?
A report published by the Wall Street Journal Friday has touched off a flurry of speculation that Facebook could file IPO papers with the U.S. Securities and Exchange Commission as early as Wednesday.
In an interview with CTV's Canada AM, IT and finance expert Dave Valliere says the timing of the sale begs the question: why now?
Valliere, who chairs the Ted Rogers School of Management Entrepreneurship and Strategy at Ryerson University in Toronto, says companies will often decide to go public when they need an injection of cash.
"That's useful if you have some great projects in mind. So people think of that as a good signal from the company -- they must have something exciting up their sleeve that they need more money than they already have," Valliere said, suggesting that would give investors might have reason to buy in.
But looking at the nearly eight-year-old company's track record, he would be surprised if that's the case.
"This is not actually known as a particularly innovative company. Somebody had a very clever idea at the beginning of it, but it's not like Google, with its Google Labs on the side constantly inventing new things.
"Facebook just does little incremental improvements, steadily."
So if the IPO is geared to turning the company's stocks liquid, Valliere suggests potential investors think twice.
"It's one thing to be a billionaire on paper, but you can't sell those shares," he said, explaining that selling shares to the public is the best way of turning money on the books into takeaway cash.
When a company's founders are looking to crystallize their wealth, however, it's time to ask questions about the future of the company.
But if you do decide you want to own a piece of Facebook, it's hard to get in on that initial sale.
"The investment bank that runs the process will give them to their friends -- big investment funds, big pension funds and people like that," Valliere said.
Only then might those initial investors turn around and sell shares to the public.
Based on Valliere's analysis, however, waiting until the dust settles might be wise.
Calling the company "grossly-overvalued," Valliere told Canada AM that a valuation of between $75 and $100 billion would see Facebook trading five times higher than Apple and 3 times higher than Google. Combine that with a price-earnings ratio of 80 -- compared to Google's 19 and Apple's 12.7 -- and Valliere says Facebook's stock might not hold up after a first-day pop.
Speculation that a Facebook IPO could raise as much as $10 billion dollars, ranks the company among the world's 25 largest and the biggest ever for a U.S. Internet company.
Google currently holds that record, after raising a total of $1.9 billion -- including shares sold by early investors as well as extra stock issued to meet the heavy demand -- and grabbing a market value of $23 billion when it went public in 2004. Google's market cap now stands at $190 billion -- down from a peak of approximately $235 billion in November 2007.
It's not known whether Facebook's $10 billion IPO target includes early investors' shares.
Facebook, famously started by Mark Zuckerberg and his Harvard college roommates in 2004, now has more than 500 investors with a stake in the company.
Since the company passed the 500-shareholder mark in 2011, U.S. rules require it to open its books by late April of this year. That's fuelled speculation the company will try to time its IPO to reap some financial reward from disclosing its quarterly financial results and other details.
Forbes magazine has pegged 27-year-old Zuckerberg's net worth at $17.5 billion, mostly drawn from trading in the company's limited stock.
In Valliere's view, whether you think the company is a good investment or not, owning a share in the company would at least give you bragging rights over the man who Time magazine named its 2010 person of the year.
"You get the fun of saying I'm part-owner of Facebook -- he (Zuckerberg) works for me."
