Bangalore: A recent report that shook the global IPO market was the announcement of its upcoming public issue by the social media major, Facebook. What was even more surprising was the humongous valuation that the company is slated to price its IPO at.

Facebook is preparing for an IPO next year as it looks to raise US$10 billion by selling a 10 percent stake. This would value the entire company at a mammoth US$100 billion, or double the valuation of Hewlett-Packard.

As per a Wall Street Journal report,"The social network, which now claims more than 800 million members after seven years of explosive growth, has not selected bankers to manage what would be a very closely watched IPO. But it had drafted an internal prospectus and was ready at any moment to pull the IPO trigger."

At US$ 100 billion valuation and with 800 million members, the per member valuations comes to US$ 125, which is high by any standards, especially when a majority of these members do not contribute directly to the company's sales and profits.

The US$100 billion valuation would also be twice as high as it was in January, when Facebook had announced a US$1.5 billion investment from Goldman Sachs and other backers.

Also, at US$10 billion, the IPO would be bigger than any other technology IPO, even dwarfing the mega IPO of Infineon Technologies AG, which raised US$5.23 billion in the heydays of the dotcom boom of 2000.

Anyways, the biggest question that surrounds the Facebook IPO is -"What justifies a mega valuation of US$ 100 billion for a company that does not produce anything but online 'friendships' and 'likes'?"

Of course, the company is a great hit in the social media genre, but then is that a big enough reason for it to claim its value at US$ 100 billion, which is as high as 50 percent of Microsoft and Google, two technology companies that have a clear-cut revenue and profit generating model and have been existence for much longer.

Benjamin Graham, the father of value investing, wrote in his 'The Intelligent Investor'..

"In every case, investors have burned themselves on IPOs, have stayed away for at least two years, but have always returned for another scalding. For as long as stock markets have existed, investors have gone through this manic-depressive cycle.

"In America's first great IPO boom back in 1825, a man was said to have been squeezed to death in the stampede of speculators trying to buy shares in the new Bank of Southwark. The wealthiest buyers hired thugs to punch their way to the front of the line. Sure enough, by 1829, stocks had lost roughly 25 percent of their value."

Seeing the history of IPOs that have come globally and in India over the past many years, I have come to believe in Graham's definition of IPOs in The Intelligent Investor.

He said that intelligent investors should conclude that IPO does not stand only for 'initial public offering'. More accurately, it is shorthand for...

* It's Probably Overpriced, or

* Imaginary Profits Only, or even

* Insiders' Private Opportunity

Facebook's seems to me to be one of them.

The author is Vishal Khandelwal, promoter of Safal Niveshak. Vishal, with his vast experience as a stock market analyst trains people to become sensible and successful investors. You can read his articles and reach him through http://www.safalniveshak.com/