Facebook Raises $16 Billion in I.P.O.

Facebook pulled it off.

As investors raced to buy shares, the sprawling social network raised $16 billion on Thursday, in an initial public offering that valued Facebook at $104 billion.

While the I.P.O. shares, 421 million of them, are being sold at $38 each, the feverish anticipation of their debut could drive them higher on Friday when the stock starts trading about 11 a.m. Newly public technology stocks — particularly ones that have captured investors’ attention like Facebook — often achieve double-digit gains in a one-day pop.

Investors who buy Facebook shares are taking a stake in a unique and potentially valuable business. But they are also exposing themselves to the risks posed by a relatively young company operating in uncharted territory.

The I.P.O. signals a rapid evolution for the company. In just eight years, Facebook has gone from a scrappy college service founded in a Harvard dormitory to the third-largest public offering in the history of the United States, behind General Motors and Visa.

Investors now consider Facebook more stalwart than start-up. At $104 billion, the social network’s market value is higher than those of McDonald’s, Citigroup, Amazon and all but a handful of other American companies.

“Facebook is here to stay,” said Navin Chaddha, a managing director of the Mayfield Fund, a venture capital firm. “It’s a virtual economy where people are spending more time than any other Internet property.”

Facebook will be celebrating the occasion in the same style on which it built its reputation.

The social network planned to celebrate its 31st “hackathon” on Thursday night, with engineers coding into the wee hours, employees amped up on Red Bull and workers-turned-D.J.’s playing their tunes, Facebook said. Part work, part fun, the Facebook tradition, which will take place in an area of the company’s campus known as Hacker Square, encourages employees to do what they do best: brainstorm, design and create.

On Friday, Mark Zuckerberg, the hoodie-wearing founder whose stake after the I.P.O. is worth $19 billion, is set to ring the opening bell for the Nasdaq from Facebook’s headquarters in Menlo Park, Calif., surrounded by executives, engineers and other employees. Shares of Facebook, which will trade under the ticker FB, will start trading shortly thereafter.

For now, Facebook seems to be a must-own stock.

As the largest player in the social media arena, Facebook has enjoyed blue-chip status from the start, with investors worried about missing out on what could be the next Google. The social network will also soon join the Nasdaq 100, the technology index, so money managers looking to track the benchmark will join the swell of demand in the coming months.

The frenzy for Facebook was on full display in the weeks leading up to its I.P.O.

On May 4, JPMorgan Chase, one of the I.P.O. bankers, redecorated its Manhattan headquarters with a giant Facebook flag and welcomed the company’s management team to discuss the scheduled roadshow. Before an equity sales team of 300, Jamie Dimon, the firm’s chief executive, made a rare appearance. Alongside him was the deal maker Jimmy Lee, who affectionately called Facebook “the next great blue-chip.”

In the weeks that followed, investors packed hotel ballrooms to hear Facebook executives give their pitch. Bankers drew up waiting lists for the events, which included stops in New York, Boston and Palo Alto, Calif.

The tour yielded an avalanche of orders. With investors lining up for shares, Facebook raised its price range and increased the size of its offering. Even so, demand from investors in the United States alone outstripped the number of shares by 30 times, according to one person with knowledge of the situation, who requested anonymity because the matter was private.

On Thursday, the underwriters met one more time at Facebook’s headquarters to settle on a final price. The bankers, along with Facebook’s chief financial officer, David Ebersman, discussed a price as high as $40 a share, above the estimated range. While demand was strong even at that level, the largest institutional investors, the pillars of any offering, pushed back a bit on the valuation. By early afternoon, the stock price was set at $38.

Facebook landed its record I.P.O. in the face of doubts about the company’s main source of revenue: advertising.

After years of courting Madison Avenue, Facebook is still trying to persuade companies to not only build a presence on its site, but spend real dollars on advertising. Just as important, the company has to find ways to insert advertising into its users’ activity without making the site cluttered or irritating.

Inconveniently, General Motors, one of the country’s biggest advertisers, said this week that it was discontinuing its advertising on Facebook. That amounted to $10 million, a drop in the ocean for Facebook, but it exposed the social network’s Achilles’ heel. Investors, experts caution, will have to be patient for Madison Avenue to come around.

“It could take many years to calculate Facebook’s impact,” said Martin Sorrell, the chief executive of WPP, the large advertising company. “There’s a lot of pressure for them to monetize their content and demonstrate productivity, but you can’t do it overnight.”

In addition, Facebook may struggle to generate advertising revenue from the mobile space. Last month, it paid about $1 billion for Instagram, a mobile photo-sharing application that has plenty of users but not a scratch of revenue. Given the growth of smartphone use and the increasing amount of time those devices command, solving the mobile question is widely seen as a necessity, not an option, for Mr. Zuckerberg.

At the moment, investors are willing to give Facebook the benefit of the doubt.

Facebook is set to trade at more than 100 times its earnings for the last 12 months. At that level, investors assume the company will be far more profitable than the rest of corporate America. The Standard & Poor’s 500-stock index trades at 14 times earnings.

Facebook’s fans think the rich valuation is warranted, given the company’s prospects for earnings. The company’s net income could be $4.5 billion in 2014, up from $1.2 billion last year, according to Ken Sena, an analyst at Evercore Partners.

But Facebook’s results will depend on whether companies are willing to shell out their marketing dollars for a chance to reach the social network’s 900 million users — and it’s not clear advertisers will be willing to pay.

While Facebook is often compared with Google, the search giant has a relatively straightforward, and proven, method of generating most of its advertising revenue. It matches ads with what people are searching for. By contrast, Facebook has the potentially more demanding task of finding ways to insert ads into users’ activity without cluttering their experience.

Bullish investors point to Facebook’s profit margins, which are much bigger than Google’s. “A lot of people don’t understand how profitable Facebook is,” said Thomas Vandeventer, manager of the Tocqueville Opportunity Fund, which already owns Facebook shares. In 2005, Google’s operating profit amounted to 34 percent of its revenue. Last year, Facebook’s were 47 percent.

Facebook’s user activity could also provide the company with a richer array of data than Google. The company just needs to work out ways of using this data for advertisers.

Facebook, in many ways, is like a mining company sitting on valuable deposits that are hard to dig up and refine. At a market value of $104 billion, investors think Facebook is sitting on gold. But the share price could tumble at any sign that Facebook’s management cannot unearth it.