Saturday 4 February 2012

Facebook IPO.

Interesting to read the increasing flow of news ahead of the Facebook IPO.

It is likely to be hype, hype, hype ahead of the launch and will provide significant rewards to the winners in last years auction which put a value of around $50bn on the company.
At the time, I recall new shareholders immediately talking up the valuations to match today's suggested $75-$100bn valuation and much like a pyramid or Ponzi scheme there will be a huge pay-off to these privileged first movers should they decide to cash in.
Now with 845 million subscribers, the question has always been how will the company leverage its huge membership base to make the profits that are now being expected of it.

The public offering will involve approx. 10% of the company's shares and, with the objective being to raise up to $10bn, suggests an internal valuation of up to $100bn.
Various estimates of 2011 earnings and revenues have been bandied about before Facebook's regulatory filing which stated $1.0bn ($606m) on $3.7bn sales ($1.97bn) which equates to just $1.10 per each of its 845m subscribers (http://www.guardian.co.uk: Facebook files for $5bn IPO).
$1.10 does seem to leave the way open for significant growth but I guess the downside is that it has managed to grow and supplant previously successful social networks such as Bebo, Myspace, and others probably by avoiding the onslaught of advertising until it had reached a certain critical mass.

The issue for Facebook then, is can it continue to be as popular with increasing amounts of targeted advertising based upon the information members are entering and sharing. 
Will members become disillusioned with such personal and potentially invasive advertising? Privacy issues will once again come to the fore I suspect if commercialisation is not managed sensitively.

The lack of success amongst rivals to date might also reflect the less mature and aggressive advertising in use on Facebook which further underlines the risk in commercialising its offering to a level meeting investors expectations. This has possibly been one of its selling points but is not likely to remain so in the future.

From a new investor perspective the earnings, valuation, and a speculated launch price of $38 puts the company on anywhere between 66 and 100 time earnings (http://online.barrons.com: At Long Last, Facebook) and like last years Linkedin IPO brings to mind the heady days of the dot.com boom particularly when discussions around prospects pulls in a sales multiple for the valuation i.e 27 times sales = $100bn. But at least Facebook is making a profit and that it is up 66% in the current year to $1bn ($606bn).
Dot.com speculators used this method to inflationary effect, as no historic profits were available and no immediate future profits were foreseeable.

The only reasonable comparison seems to be to Google's IPO hence the very similar initial sales multiple valuation but it again comes back to the question: can Facebook maximise its customer base through exposure to advertising and products in the way that Google has been doing. Google has attempted to control the portals to the world wide web through its search engine and integrated products like Gmail, Chrome OS, and Android OS. Facebook is going to be reliant on its creation of a stand alone environment with which to create a captive consumer audience for advertisers.
This could yet form a tipping point which is not to say that Facebook can't significantly increase that paltry $1.10 per member (customer!) spend.
As a result I suspect that Facebooks prospects are huge but, by the same token, probably someway short of current speculation and the blue sky valuation that it seems set to launch at.

There is also the unknown plans of existing shareholders who with such a large proportion of, and significant investment in, the company's shares may decide to cash in, or enjoy the fever pitched ride for a time. 
Control of the company still sits with Zuckerberg but it remains to be seen whether he can run the business and balance the needs of Facebook's 845m members, advertisers, and shareholders. 
Companies with shared fortunes, like game maker Zynga are already up some 65% following news of the Facebook IPO.

It is an interesting one to watch, and watching is all that I will be doing at this stage. 
There is still far too much to be concerned about than I can safely buy into on faith. 
It also doesn't fit my strategy at this time, but I also don't doubt that it will be a roller coaster over the next few years as reality kicks in.
Who's to say that a more opportunistic entry point might not present itself.

Related article links:
- http://www.guardian.co.uk: Facebook's investors - who owns what

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