The Impact Of Facebook's FPO

  • Facebook announces FPO with 70 million shares at a price of $55.05 per share.
  • Share dilution to have minimal impact on earnings and cash in hand.
  • FB stock trades at a PE ratio of 120 making it overvalued.

Facebook FPO

Facebook (FB) has announced a follow on public offering (FPO) of 70 million shares of its Class A common stock at a price of $55.05 per share. When Facebook had gone public in 2012, it was certainly the biggest stock debut for an internet company. Soon after the IPO, investors had penalized Facebook for being overvalued. However, after the initial dip in price, the stock has turned around and is currently trading 51% higher than its IPO price of $38 per share. Facebook stock price has been a roller coaster ride so far, as can be seen in the Facebook stock chart below. A year and a half later, comes the FPO. The company will sell 27 million new shares and 43 million shares of existing shareholders. The bulk of the shares come from Mark Zuckerberg, selling over 41 million shares worth $2.3 billion. Investors are wondering whether the FPO is intended for gaining some additional cash or does Mark’s dilution in Facebook indicate that the stock price is at its peak?

Facebook Stock Price Movement

FB Stock Price chart
Source: Facebook stock chart

Use of Facebook's FPO proceeds

The company has not provided specific details about the use of proceeds of sale. Facebook is already cash rich having $9.3 billion cash and cash equivalents, including marketable securities. Therefore, it seems less likely that the FPO is needed to gain additional capital. However, Facebook is cashing in on its strong market capitalization, which is at an all-time high. Facebook has been making headlines for acquiring start-ups and cash may be used to make potential acquisitions in order to stay ahead of competitors. The company is also in plans of building internet infrastructure.

Facebook got added to S&P 100 and 500 index recently. The new shares being offered by Facebook will be offered to index funds whose portfolios are based on stocks included in S&P 500. Zuckerberg’s primary use of proceeds will be to pay taxes that he incurred in connection with his exercise of an outstanding stock option to purchase 60 million shares of Class B common stock. He also plans to make $1 billion contribution to charity. Therefore, Mark’s dilution of shares and consequential decrease in voting power does not seem like an indication of management’s lack of trust in the company but just a way for Zuckerberg to raise the cash needed.

Impact on Share Dilution

The additional 27 million shares will increase the current outstanding share count of 2.43 billion shares by roughly 1% and is expected to have minimal effect on the earnings per share.

Facebook’s recent performance and growth ahead

Facebook has picked up in terms of ad revenues in the second half of 2013 and has been monetizing its mobile users more effectively. Though there have been some negative news regarding the company’s privacy policy and teens leaving Facebook, the company has recouped from those and reported strong results in the second half with a sound balance sheet and cash flows. The  news of the company’s inclusion in S&P 500 index has impressed its investors and Facebook is currently trading at an all-time high stock price of $57.77 per share. Furthermore, the recent launch of video ads has been received positively by investors and expected to be a strong revenue driver in future. Therefore, in the midst of a successful and promising year it is less likely that Facebook’s FPO would raise a red flag to Facebook’s investors regarding market capitalization being at its peak.

Facebook cash position from 2011 to 2013
Source: Facebook Balance Sheet

Mark Zuckerberg is routing the sale through FPO probably to avoid selling his share through the regular insider sale mechanism. Given that the dilution is minimal, we expect no real impact of the dilution on earnings and cash in hand. However, the real challenge will be Q4 results. With the FPO coming in last week of the quarter, Facebook performance in the coming quarter will be crucial to investors and determine the road ahead. Currently Facebook is trading at a PE ratio of 120, which is on the far higher side compared to the industry. Facebook needs to generate good growth numbers in order to justify the current price levels.  Following the news of the FPO, Facebook’s stock price has registered 4.8% increase in share price and closed at $57.77 on Dec 23, 2013. View our Facebook stock analysis.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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