All the attention in tech land is focused on Facebook, as the social media juggernaut prepares to file paperwork for its IPO as early as Wednesday. You can forget about Groupon (GRPN), the social buying site that went public last year in a high-profile IPO and now seems to get little attention. Facebook will likely be the hottest IPO in the tech community since Google (GOOG) went public in 2004.
As with Google, Facebook shares are likely to go public to a very demanding market and probably have a very nice pop on day one. With close to a billion users and counting, Facebook has a consumer reach that is unparalleled in the history of commerce.
The revenue and profit potential of that consumer reach is the reason that Facebook will likely become a $100 billion company after the IPO. I'm not big on investing in IPOs, but Facebook is that extraordinary IPO that comes along every so often. Google was an extraordinary IPO, which I missed out on. Visa (V), in its own right, was another extraordinary IPO that I participated in.
Otherwise, if I were choosing to invest in a large-cap tech name it would be hard to choose Facebook over today's king, Apple (AAPL). Apple continues to defy the law of large numbers, making it look easy to double billions of dollars in profit. Apple earned more income in the first quarter of fiscal 2012, $13 billion to be exact, than it did for nearly all of fiscal year 2010. More importantly, the company now sits on nearly $100 billion in cash. Apple has enough money to buy Facebook at the assumed high end of its IPO valuation.
At the current rate, Apple will end fiscal 2012, ending Sept. 25, with more than $150 billion in cash on the balance sheet. Apple talked about strategic alternatives with respect to that cash, but I don't know how you effectively allocate $150 billion without sending some back to shareholders. Apple's current cash balance is more than $100 per share, nearly 25% of the company's market valuation.
The new allure of a company like Facebook is almost certainly going to lead to relatively high valuation multiples. While the registration documents will confirm this, if Facebook gets a $100 billion valuation it will likely come to market trading at over 50x revenue. It's estimated that Facebook has been doubling revenue each year, with sales exceeding $1 billion in 2010. To be sure, many analysts suggest that Facebook's real growth will kick in after 2011, which is of course why the IPO will likely be the most highly-anticipated since Google.
But Apple has set a new bar for tech companies. While Apple's revenue growth may not match Facebook, Apple's growth will be impressive over the couple of years. Continued iterations of the iPhone will continue to be the main profit engine, but the iPad is just getting started. And based on last quarter's numbers, Apple is earning $1 billion in profit a week. Facebook may not earn $1 billion in profit for a few years. And when you strip out the cash from Apple, the enterprise value is $325 billion vs. $75 to $100 billion for Facebook. Investing is an economic exercise in opportunity cost. At the moment, the better bet is on Apple over Facebook.