By MoneyMorning.com.au
Sick of all the jabber about the Facebook IPO?
How can a company that makes $1 billion a year be worth $80–100 billion to the market? And who cares? You’ll have to go through a whole lot of rigmarole to invest in it even if you want to.
So rather than join the hype and speculation, we thought it might be more valuable for you if we looked back at what happened when a similar stock went public in Australia…
You know what we’re talking about…
Telstra Corporation Limited
It might seem like a stretch to compare Facebook with Telstra. But when you think about it, it’s really not…
You see, in its heyday, Telstra offered the latest in communication technology…
In fact, it gave you a way to keep in touch with your friends, your family, your business acquaintances via your home phone, mobile and email… It gave you a way to say hi, share news and photos, invite them to your birthday party, or tell them about your lousy day at work – pretty much what Facebook does.
And like Facebook, Telstra makes a fair chunk of its money selling ad space in the Yellow Pages. (Sensis, ‘Telstra’s wholly owned advertising and directories arm’ produces it). And of course it makes money selling phones, line rental and calls, too.
Do you remember what happened when Telstra first offered its shares to the public in 1997?
This chart (below) of Telstra Corp [ASX:TLS] only goes back to 1999. That’s when the second round of share buying opened to the public. The IPO was in 1997 – and shares were $3.30…
At its height in 1999, Telstra had an average price-to-earnings (P/E) ratio of 30. And cashflow of 51 cents per share.
Telstra Corporation Limited Share Price History
Source: Google Finance
As you can see in this chart, after opening at $8.41 (and treading water for 6 months) Telstra shares began a steady descent that now sees the shares trade for $3.36 each. It’s lost 59.98% of its price in 12 years.
Today, Telstra has an average P/E ratio of around 13… And cashflow of 21 cents per share. And the shares currently trade just above the IPO price of $3.30.
The problem is investors overpaid. And why did they overpay? Because of the euphoria of being the first to buy ‘the next big thing’… The fear of missing out… The promise of blue-sky projections…
And it pushed the share price up 154% on the $3.30 IPO in 1997… Only to see it come crashing down to earth once the euphoria wore off.
Will it be the same story for Facebook shareholders?
Aaron Tyrrell
Editor, Money Morning
