Facebook IPO Analysis

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Facebook, Inc:
The Initial Public Offering

1. How does Facebook make money? What are the value drivers of its business? What is its comparative advantage relative to other social networking companies?

(1) Facebook makes money from the following three main fields
First is the advertising. According to the case, we know that the major revenue of Facebook is advertising, which took up 98 percent in 2009, 95 percent in 2010 and 85 percent in 2011. Facebook uses all information uploaded by users to become the property of the firm. By analyzing database, Facebook provides advertisers target customized services and products based on users’ preferences and connections. In its view, the advertising which based on social …show more content…

McNeil and his team had analyzed the performance of recent IPOs by LinkedIn, Groupon and Zynga. Performance of these three IPOs is shown in Table-1. Data in Table-1 are from Exhibit-6 in the case.

Table-1 Recent IPOs’ performance

As we can see in Table-1, the stock price of all the three companies started to drop just after the 1st day of IPO. Besides, we can see that the IPO price of LinkedIn and Groupon was above the initial price range. (LinkedIn increased its price range to $42 to $45 on the day before the pricing.) It was high IPO price that made the price drop so quick like the table showed. However, though the IPO price of Zynga was in the price range, its performance was not good either. So we can conclude that there was a downturn in IPO market at that time.

4. What is the intrinsic value of a Facebook share? How does this value compare to the price being discussed by the underwriters?

(1) The basic approach to value Facebook is a discounted cash flow (DCF) analysis. In this case, the DCF analysis was based on the assumptions from Professor Aswath Damodaran, NYU Stern School of Business.
The following are the main assumptions from Prof. Damodaran, according to Exhibit 11. Attention, some data are different from those in Exhibit 11. (All the assumptions are for the period of next 10 years from 2012 to 2021.)
Revenue growth rate will remain 40% in next 5 years. Then the growth rate will decrease by 7.6% per year after 2016 and in the terminal

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