On Monday, news surfaced that a small investment fund, GSV Capital, had purchased $6.6 million worth of shares of Facebook in the private market at a price that values the entire company at $70 billion. Here's my prediction: At the end of its first day of trading as a public company, Facebook's market capitalization will exceed $150 billion. If that sounds like fantasy, you should know that Facebook shares changed hands at that valuation in January on SharesPost, a private market for pre-IPO companies.

Google: the Facebook of 2004
Here's a benchmark for that figure: Google's (Nasdaq: GOOG) market value at the end of its first day of trading was a mere $27 billion. The search leader's IPO was the Facebook of its day, the most highly anticipated IPO of 2004. The following table contains direct comparables and milestone technology IPOs:

 

IPO Date

Trailing-12-Month Revenues at IPO

Price-to-Sales Multiple (end of first trading day)

Historical

 

 

 
Google Aug. 19, 2004 $2.3 billion 11.9
eBay (Nasdaq: EBAY) Sept. 24, 1998 $19.1 million 98.7
Amazon.com (Nasdaq: AMZN) May 16, 1997 $30.9 million 18.1
LinkedIn (NYSE: LNKD) May 19, 2011 $292.3 million 31.3
Pandora (NYSE: P) June 15, 2011 $167.2 million 17.4

Hypothetical

 

 

 
Facebook Q1 2012 $4 billion*

37.5

(assuming a $150 billion market value)

Source: Author's calculations, based on company filings. *Revenue estimate for 2011.

Don't make bad bets
At a $150 billion market value, Facebook's price-to-sales multiple would only be roughly 20% higher than LinkedIn's, which suggests it could easily occur. However, at three times Google's multiple, I think investors who buy in at that price would be setting themselves up for near certain disappointment. Would it be possible to earn an adequate return from that level (I'll define "adequate" as a 15% annualized return over the five years that follow the IPO)? It's possible but it's highly unlikely, an absolute best-case scenario in which Facebook manages its growth flawlessly and faces no competitive threat. That's not something I'd want to bet on to earn a 15% annualized return.

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