Featured IPO Week of 5/14/12

Featured IPO
Friending Investors

The world's largest social network, Facebook is on track to complete its long anticipated IPO this week. Facebook plans to raise $10.6 billion, making it the fifth largest US IPO ever, by offering 337.4 million shares (47% insider) at a price range of $28 to $35. At the midpoint of the range, Facebook would have a market cap of $86.2 billion. Eleven banks are joint bookrunners, including Morgan Stanley, J.P. Morgan and Goldman Sachs, in what is one of three deals scheduled to price this week on the US IPO calendar.

Note: Facebook raised the proposed deal size for its upcoming IPO on Tuesday. The social networking giant now plans to raise $12.1 billion by offering 337 million shares (47% insider) at a price range of $34 to $38. At the midpoint of the revised range, Facebook would command a market value of $98.6 billion.


Facebook operates a social platform that enables users to create profiles, communicate and share content between users and play online games, among other features. Since its 2004 founding, Facebook has rapidly grown to boast 901 million monthly active users and 526 million daily active users. Facebook generates the majority of its revenue from advertising, including display ads as well as premium ads with interactive content or more visible placement. More recently, it has introduced a proprietary payments infrastructure that entitles it to receive a cut of revenue from social game companies like Zynga. Facebook has rapidly achieved a successful operating model with revenue exceeding $4 billion and EBITDA margins above 60%.


For the fiscal 1Q ended March, sales grew 45% to $1.1 billion as a result of 37% growth in advertising revenue and 98% growth in payments revenue. Monthly active users (MAUs) rose 33% and daily active users (DAUs) rose 41%. Operating income, excluding stock-based compensation, increased 23% to $484 million, slower than sales, as a result of significant increases in sales and marketing and R&D headcount.


Founder and CEO Mark Zuckerberg will control 59% of voting power and will need demonstrate an ability to manage Facebook to meet investors' high expectations. Additionally, revenue growth has slowed in recent quarters, and while growth remains in excess of 40%, slowing user growth and user shift toward mobile devices which it has yet to significantly monetize, could result in revenue growth deceleration. Finally, 19% of total revenue in 2011 was derived from Zynga and payment revenue fell sequentially in 1Q12.


Given Facebook's rapid user growth and increasing focus on revenue conversion, Facebook appears to be well positioned for expansion in a $68 billion online advertising market and $1.5billion mobile advertising market. While decelerating growth is a concern, newer ad formats could help rejuvenate growth and the company may also be able to lever its platform into new revenue sources. Strong trading from peer social network LinkedIn (up 146% since going public one year ago) will also aid what is sure to be wide demand from investors in the most anticipated IPO since Google's 2004 debut.

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As stated in the Prospectus, the total annual operating expenses for the Fund was 3.48%. The Adviser has contractually agreed to keep net expenses from exceeding 2.50% of the Fund’s average daily net assets for at least a year from the date of the Prospectus and for an indefinite period thereafter subject to annual re-approval of the agreement by the Board of Trustees. An investor cannot invest directly in an index. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.

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