Term Sheet

The latest on private equity, M&A, deals and movements — from Wall Street to Silicon Valley

Can Facebook's IPO pay off for investors?

May 4, 2012: 9:29 AM ET

Facebook expects a valuation of as much as $96 billion. That implies some lofty revenue growth figures.

FORTUNE -- Last month, Fortune asked if Facebook's stock was worth buying if the company is valued at $100 billion. The conclusion: It might be! Then came news yesterday that Facebook will price its IPO between $28 and $35 a share, implying a valuation between $77 billion and $96 billion for the young tech giant.

We've already said what kinds of hurdles Facebook faces with a $100 billion valuation. But what if shares trade near the low-end of the spectrum, say for $28, and don't bounce on the first day of trading? What kind of prospects does the stock offer then?

According to the numbers crunchers at EVA Dimensions, a $28 share price means the market thinks Facebook will grow to sales of just over $50 billion in the year 2021. That's still an impressive 30% annual compound growth rate, but it seems much easier to achieve than the $68 billion in sales implied by a $100 billion valuation. Those sales figures assume that Facebook's margins don't deteriorate badly from here. (Facebook, it turns out, earns amazing profit margins when you consider its capital costs. Last year it earned $1 billion on just $3.7 billion in sales— what EVA Dimensions calls "monopoly-like margins.")

We've said before, Google (GOOG) once faced the same hurdles but eventually grew into its valuation, and took stock investors on a ride from $85 to $650 along the way.

There's no easy take on Facebook stock. If you believe it can continue its torrid sales growth without killing margins, the stock looks like an amazing opportunity. If you doubt it can continue boosting sales, stay away.

Read last month's Fortune story on Facebook's valuation here.

Posted in: ,
Join the Conversation
About This Author
Scott Cendrowski
Scott Cendrowski
Writer, Fortune

Scott Cendrowski is a writer at Fortune based in Beijing, where he covers business in China. He moved there in late 2013 from New York, where he wrote about Wall Street and investing. Before joining the magazine in 2008, he was a Pulliam Fellow at The Arizona Republic and an intern for Bloomberg News. A Detroit native, he has a B.A. in public policy from Michigan State University.

Follow Scott on Twitter @scendrowski

Email Scott
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.