Infographic: Facebook IPO Hype Meter

Google and Lululemon had big, bold IPO market caps but still paid off. Will Facebook?

Joe Castaldo 0

An initial public offering is the first chance for a company to truly find out its worth. Facebook earned a valuation of US$104 billion when it went public on May 18, in the most anticipated IPO in years. That valuation is also 104 times bigger than the company’s profit in 2011, causing some to worry that Facebook is overpriced. For perspective, we’ve applied the same measure—market capitalization divided by profit—to other notable public offerings to create our own IPO Hype Meter. The result: the Facebook frenzy is intense but not unprecedented. A pricey IPO doesn’t always mean poor returns in the short-term; hype can help drive shares higher over the next year. But Facebook’s high valuation has so far proven to be unwarranted. The company’s share price plummeted 26% during the first three days of trading, helping to confirm what many academic studies have shown: investors tend to get better returns over the long run from IPOs that debut at more reasonable prices.


 

Leave a comment

Your email address will not be published. Required fields are marked *