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The Most Dangerous IPO of 2012…

The IPO market is set for a breakout year in 2012.

With a logjam of postponed pre-recession launches still not cleared, over 200 IPOs are on tap for 2012.

But one company will dominate the headlines – social networking site, Facebook.

After months of rumors and speculation, The Wall Street Journal reports that Facebook will finally go public during the second quarter. And the company aims to raise a fortune for it…

Facebook’s $10 Billion Wall Street Post

Far from its humble beginnings in Mark Zuckerberg’s Harvard University dorm room, Facebook plans to hit the Street with a $10 billion IPO.

To put that in perspective, it would easily set a new technology sector IPO record, smashing the $5.23 billion that Infineon Technologies (OTC: IFNNY.PK) raised in 1999. It would even crush the “meager” $1.67 billion that major rival, Google (Nasdaq: GOOG), raised for its 2004 IPO. In fact, Facebook would join General Motors (NYSE: GM), AT&T (NYSE: T) and Visa (NYSE: V) as companies that debuted with more than $10 billion. (Visa holds the all-time record, with $19.6 billion.)

By the time Facebook hits Wall Street, projections suggest it will be worth $100 billion – double its value from January 2011 and one-third more than its current $66.6 billion, according to SharesPost, Inc. It would immediately become the second most valuable internet company… but a distant second behind Google, which boasts a market cap of $188.8 billion.

$100 billion, eh? What nonsense…

Would You Pay $100 Billion to Buy Facebook?

As eMarketer notes, Facebook’s revenue will double to $4.27 billion this year, compared with $2 billion in 2010.

So with a price tag of $100 billion, Facebook would be worth 23 times its projected revenue. By contrast, Google is worth 6.5 times its sales, while Apple (with a $355 billion market cap) is valued at 2.6 times its revenue.

But it gets really shaky when you consider that a whopping $3.8 billion of Facebook’s sales will come from advertising – up 104% over 2010.

Talk about being too reliant on one revenue stream.

This alone makes a $100 billion valuation nothing more than pure fantasy.

Having put off an IPO for many months, though, Zuckerberg and COO, Sheryl Sandberg, clearly see it as a chance to take advantage of pent-up IPO demand. And there’s no doubt that they, and the other preferred shareholders, will make a fortune from it.

But the caution flag is waving for regular investors…

The Time is Now for Facebook… But Not for Investors

For starters, unlike many IPOs, Facebook is hardly an unknown quantity. Nor will it be one of those under-the-radar IPOs, which give investors a chance to get in before the crowd.

Facebook’s popularity is bigger than ever, with the site now boasting over 800 million users – up from 66 million in 2008. But much will depend on its ability to continue raking in advertising revenue. And with this accounting for such a large chunk of overall sales, even a slight drop would affect the share price. There’s also a question of whether it can remain the same no-holds-barred innovator under the Wall Street spotlight.

To be fair, Facebook is exploring other avenues. But they’re nothing more than blind alleys.

For example, the company wants to marry its social networking power with the fast-growing mobile technology market…

The Upwardly Mobile Social Network

Facebook already boasts 350 million mobile users and according to Business Insider, the company expects its next one billion users to come from the mobile world, rather than the static one. In other words, from smartphones and tablet computers, not traditional desktop PCs.

As a result, All Things Digital reports that Facebook has enlisted HTC, to create a smartphone that will run on a bespoke Android operating system for Facebook. France Telecom’s Orange Division also recently announced that it will make Facebook-specific phones for Europe and Africa.

Nice try, guys. But we’re not buying it. Literally. Aside from the obvious problem of attempting to crack a smartphone market that Apple and Google completely dominate, my colleague, Justin Fritz, explains why a Facebook smartphone is a particularly ill-conceived idea.

As with any highly anticipated IPO, hype will be at a fever pitch. Don’t expect previous tech sector IPO disappointments – Groupon, for example – to dampen enthusiasm.

But there’s just no way that Facebook is worth $100 billion. So before the mania intensifies, I urge you to check Louis Basenese’s column on why the Facebook IPO is “the greatest short-selling opportunity ever.”

Good investing,

Martin Denholm

Martin Denholm

, Managing Editor

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