INTRODUCTION
The value of a company may be interpreted in different ways. One way is by the summary of all the assets (physical and intangibles) that the company have considering minus liabilities in short and long term. The other way to determine the value of a company is by the estimation of the future cash flow of the company considering the current data, investments, current products and future products under development. The price and the value of the company are not the same concepts. The price of a company is an objective value that is available in the Stock Exchanges, Newspapers and the Securities Commission Exchange. The value of a company is a calculated or estimated value that depends on the point of view of the analyst, the economy environment and the company itself. A simple rule is that when the price of a company is bellowed the calculated value, the company is cheap, and it is recommended to buy; instead, when the price of the company is over the calculated value the company is expensive, and it is recommended to sell.
Facebook Inc. is a social network company that went public on the New York Stock Exchange in 2012. The company valuation of the company and the price of the company share is always in the discussion. The comparison between value and price is, similar to other high technology companies, a problem when several high technology companies do not have current revenues..
a. Evaluation of Initial Public Offering value of Facebook, Inc.
Facebook Inc. is a social network company founded by Mark Zuckerberg is February 4, 2004, to offer a way to communicate with colleagues and friends, sharing photos with the option to tag them with contacts and "likes" options. The social network at the beginning was more robust that other existing social networks as Hi5, MySpace, and MSN Space. The company each year received the interests of several investors and companies to acquire equity and control of Facebook. VIACOM in 2006 proposed to buy the company for 75 million dollars, Yahoo! For one billion dollars. The company and its Chief Executive Officer refused to give the control of the company to a third company. Instead, the company emitted preferred stocks for new private investors as mutual funds and Microsoft to give working capital to the company when the company was not generating cash flow.
Once the company reached the five hundred shareholders, the company must see the Securities Exchange Commission Rules of public companies. That was the first incentive for the company to go public. The problem for the company was the capacity to generate cash flow although the number of users, visits and "likes" were growing every month.
The company filed in 2011 the required documents to the Security Exchange Commission to prepare the company for its Initial Public Office. On May 18th, 2012, the company at 11:30 Eastern Time, the company went public with an initial price of 38 USD (Statista, 2016).
The price of 38 USD was fixed by the lead investment bank of Facebook, Morgan Stanley at the moment of the IPO. Previously the calculated price for Facebook Inc. was in the interval from 28 USD to 35 USD. That difference between the IPO price and the calculated value by Morgan Stanley introduced confusion between the investors. A valuation of 28 USD per share is a 77 billion dollar company value with 901 million users in the first quarter of 2012 that is a value of 85 USD per registered user of Facebook. Almost all the services of Facebook are free, and the majority of Facebook user did not use paid services of the company. A lack of ability of the company to generate cash flow and a high IPO price were the scenario in the first quarter of 2012 for Facebook Inc.
b. First year performance of Facebook Inc. shares in the first year
The first year of the company is on May 18th, 2012 and may 2012 18th, 2013. The company share has its highest value on June 17th, 2012 with a value of 33.05, and its lowest value was 18.03 on August 26th 2012 (Educ BA, 2014). The market did not consider the value of Morgan Stanley for Facebook a reasonable price.
The Facebook stock overpassed the value of 38 USD of the company in August 2013. The improvement of the performance of the stock, and the company itself was for the report of the increase in revenues in advertising for mobile devices. The company, previous to 2013 focused its advertising strategy with desktop and "fixed" users not taking the approach of the mobile users which are higher in quantity than the "fixed" users. The logic is that the "fixed" client uses the service when the desktop is on, but the "mobile" user is online twenty-four hours, increasing the interest of advertising companies to create campaigns for mobile users through Facebook (Nair, 2014).
The second factor that affected the Facebook performance in the first weeks of the IPO was the bad execution of the IPO. There was a pressure of quick profit of the investors, and the responses of the Facebook leaders was to increase the volume of shares available and a cut in the price forecasts for the company (Wahlen, Baginski, & Bradshaw, 2010).
The third factor that affected the company the first year was the received lawsuits by Morgan Stanley and Facebook for the lower earning expectation that they revealed after the IPO. The information was revealed previously to the large investors avoiding the information disclosure to the small investors that suffered important losses. Because 57% of the offered shares of the company were offered by investors with inside information, the small investors did not have trust in the company and the stock (Luckerson, 2014).
c. Alternative valuation method of Facebook Inc.
The valuation of high-tech and digital companies is always a difficult subject, especially when there are companies without flow cash, but a high valuation is given by analysts and insiders.
The valuation, using the fundamental analysis, is based on the future growth of dividends and cash flow of the company to the investors and shareholders. A company without current cash flow, a common situation in most of the Silicon Valley companies made difficult to the orthodox investor to evaluate a company (Ronen, 2016).
Since 2012, with the disclosure of the quarterly and annual reports of Facebook, including its cash flow, investments, and research, the investor have the tools to make a correct valuation of Facebook. First of all is necessary to consider the source of the cash flow of the company which is the users and the growth rate of these users. Facebook had in the fourth quarter of 2015 1.59 billion users with a year-to-year growth of 14%. In the long term, the growth of the users will be near to the world population growth of 1.1% year-to-year. The other data is the value per year of the average user. With those two values is possible to calculate the value of the company.
Value_company = Number_Users * Value_user
Both the number of users and the value change every year, but using a simple estimation of a cash flow per user of 1 USD, the current number of clients of the company 1.59 billion and a conservative growth value of 5% and a discount rate of 17% considering the different markets where Facebook works we have an estimated value of the company of 10.26 billion dollars (CalcXML, 2016). The number of shares of the company available to the public is 2.85 billion stocks (Y Charts, 2016); the price will be:
Price = 10.26/2.85 = 3.6 USD/share
d. Role of the Chief Executive Officer in the performance of Facebook Inc. share
Mark Zuckerberg, the Chief Executive Officer of Facebook Inc. always had a the intention to maintain the company in a private condition, that is, to have the financial statements of the company only available to a few investors and not to the public, the requirement of the SEC. The lack of cash flow of the company in the first years of operation made difficult the company to go public. Once the company had more than 500 hundred shareholders in 2010, the CEO prepared the scenario for an IPO "without rush", but the role of the CEO was not the best because the IPO process was not transparent and efficient. Zuckerberg from the IPO has diluted its position in the company to a current 28.2% stake in the company.
The role of the CEO from the IPO was to monetize Facebook to support the value of the Facebook stock. The strategy of Zuckerberg was to continue the increase of new users and the development of the mobile advertising platform to increase the revenues of the company.
e. Prediction of Facebook Inc. stock price in the following five years.
The factors to consider predicting the value of Facebook is:
■ Growth rate of the number of clients: The growth rate per year will reduce to a value near to the world population growth. Today's value is 14%; that rate will reduce to an average value between the current value and the population growth rate of 1.1%. A 5% is a more consistent value for the following five years.
■ Cash flow per client: The monetization for advertising for mobile and fixed devices depends on the content quality the company offers and the interest of their clients.
■ New services and products different to advertising: Mobile Payments and Electronic Commerce are the potential products that the company may offer to increase the cash flow sources.
■ New competitors and change in technology: A new competitor or a change in the way of communication on the internet is a challenge that the company may face in the following five years.
CONCLUSION
Facebook Inc is a social network company, public from 2012, its Chief Executive Officer, Co-Founder and most important minority shareholder is Mark Zuckerberg. The company has today most of its income and revenues from advertising. The advertising income allows the company to have the necessary cash flow to support the value of the company and the price of the share. The introduction of the company to the New York Stock Exchange represented a challenge to the company for two reasons: The difficulty to generate revenues and technical failures in the Initial Public Offer with the support of Morgan Stanley.
Reference List
CalcXML. (2016). What is the value of my business? Retrieved 04 March 2016 from https://www.calcxml.com/calculators/business-valuation?skn=#results
Educ BA. (2014). Facebook IPO. Retrieved 04 March 2016 from https://www.educba.com/facebook-ipo/
Luckerson, V. (2014). Here’s How Facebook Doubled Its IPO Price. Retrieved 04 March 2016, from Time: http://time.com/3030510/facebook-stock-doubles-ipo-price/
Nair, S. (2014). Why did Facebook’s shares fall after its initial public offering? Retrieved 04 March 2016 from Yahoo Finance: http://finance.yahoo.com/news/why-did-facebook-shares-fall-225006922.html
Ronen, L. (2016). Facebook’s IPO Scandal Comes Back To Haunt It. Retrieved 04 March 2016 from Amigobulls: http://amigobulls.com/articles/facebooks-ipo-scandal-comes-back-haunt-it
Statista. (2016). Number of monthly active Facebook users worldwide as of 4th quarter 2015 (in millions). Retrieved 04 de March from 2016, from http://www.statista.com/statistics/264810/number-of-monthly-active-facebook-users-worldwide/
Wahlen, J., Baginski, S., & Bradshaw, M. (2010). Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective (with Thomson One Printed Access Card) 7th Edition. New York: South-Western College Pub.
Y Charts. (2016). Facebook Shares Outstanding. Retrieved 03 March 2016 from https://ycharts.com/companies/FB/shares_outstanding
