Facebook divides hearts and heads

It’s hard to believe, but the Facebook bubble machine officially found another gear last night when the company confirmed it was raising the price of shares in its IPO and increasing the amount of money it is raising.

Facebook now expects to price its shares at $US34 to $US38 each, up from the $US28 to $US35 range it set earlier this month, according to its latest filing with the Securities and Exchange Commission last night.

The company, which will now raise a staggering $US12.1 billion in its float, is now expected to see its value on float day rise to somewhere from $US93 billion to $US104 billion.

As many have pointed out, that will make Facebook more valuable than household names like Disney, Kraft and a little internet outfit called Amazon.

Those names alone will be enough for many analysts and potential investors to shake their heads and walk away.

It should not be forgotten that this is a company with $3.7 billion in revenue and $1 billion in its last full year.

And a company whose revenue actually fell in the first quarter (compared to the last quarter of 2011). Facebook says this is seasonal, but surely $100 billion companies should be big enough that any seasonality is minimal.

And a company that is yet to crack the crucial problem of how to get ads on its hugely popular mobile platform.

When you consider these not insignificant problems alongside the fact that you’ve got everyone from 11-year-old kids to high school investment clubs trying to get a slice of the action, you’ve got a pretty good case for not investing in the IPO.

Even if you could, which of course you can’t. As a story on CNN said last night, investor demand has been “nothing short of pandemonium”. Facebook will be heavily oversubscribed and most likely its shares will soar on the first day of trade.

But while the head says stay away from this IPO, I can understand why there are plenty of hearts rushing to get a slice.

Facebook does feel like a unique business. The fact that it has almost one billion users who have willingly handed over endless pieces of data about their lives and use the platform so frequently is an extraordinary achievement.

Yes, the average user does not transact with the business, but the same could be said for Google, which has proven that you can convert huge user numbers and detailed user information into big profits.

If Facebook can get its advertising products right, if it can perch things on its platform like Instagram, if it can find other revenue streams, then maybe $100 billion will look cheap and getting in on the ground floor will look like genius.

Of course, “ifs” and blue sky are what all great speculative plays are about. And that’s fine if Facebook was going to be priced like a speculative play, but it’s clearly not.

I understand the hype and I get that Facebook has incredible upside. But a float provides the first opportunity to buy shares, not the last. Smart investors will have time to see if Mark Zuckerberg can turn the hype machine into a money machine.


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