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Investors Get the Chance to Assess Facebook’s Potential

With a huge initial public offering on the runway, Facebook has shown that it pays to have friends. New investors will now have to decide what they are willing to pay to be friends.

The giant social network said in a filing on Wednesday that it was seeking to raise up to $5 billion through its I.P.O. Many close to the company say that Facebook is aiming for a debut that would value it between $75 billion and $100 billion.

At the top end of the range, Facebook would be far bigger than many established American companies, including Amazon, Caterpillar, Kraft Foods, Goldman Sachs and Ford Motor. Only 26 companies in the Standard & Poor’s index of 500 stocks have a market value north of $100 billion.

Already, Facebook is a formidable moneymaker. The company, which mainly sells advertising and virtual goods, recorded revenue of $3.71 billion in 2011, an 88 percent increase from the previous year. According to its filing, Facebook posted a profit of $1 billion last year.

“Facebook will have more traffic than anyone else, and they’ll have more data than anyone else,” said Kevin Landis, the portfolio manager of Firsthand Technology Value Fund, which owns shares in the privately held company. “So, unless they are impervious to learning how to monetize that data, they should be the most valuable property on the Internet, eventually.”

A lofty valuation for Facebook would evoke the grandiose ambitions of the previous Internet boom in the late 1990s. Back then, dozens of unproven companies went public at sky-high valuations but later imploded.

Investors are eyeing the current generation of Internet companies with a healthy dose of skepticism. Zynga, the online gaming company, and Groupon, the daily deals site, have both struggled to stay above their I.P.O. prices since going public late last year.

“We’ve seen thousands of investors get burned before,” said Andrew Stoltmann, a securities lawyer in Chicago. “It’s a high risk game.”

The potential payoff is also huge.

Consider Google. After its first day of trading in 2004, the search engine giant had at a market value of $27.6 billion. Since then, the stock has jumped by about 580 percent, making Google worth nearly $190 billion today.

Facebook is still a small fraction of the size of rival Google. But many analysts believe Facebook’s fortunes will rapidly multiply as advertisers direct increasingly more capital to the Web’s social hive.

Investors are often willing to pay up for faster growth. At a market value of $100 billion, Facebook would trade at 100 times last year’s earnings. That would make the stock significantly more expensive than Google, which is currently selling at 19.6 times profits.

Newly public companies with strong growth prospects often garner high multiples. At the end of 2004, the year of its I.P.O., Google was trading at 132 times its earnings.

But investors have less expensive options for fast-growing technology companies. Apple made nearly $1 billion a week in its latest quarter, roughly the same amount Facebook earned in all of 2011. At a recent price of $456, Apple is trading for roughly 16.5 times last year’s profits.

Investors now have to try to ignore the I.P.O. hype and soberly sift through the first batch of Facebook’s financial statements to gauge the company’s potential.

Online advertising is a prime indicator. At Facebook, display ads and the like accounted for $3.15 billion of revenue in 2011, roughly 85 percent of the total. With 845 million monthly active users, advertisers now feel that Facebook has to be part of any campaign they do.

“When you have an audience that large, it’s hard not to make a lot of money from it,” said Andrew Frank, an analyst at Gartner, an industry research firm.

For all the promise of Facebook, the company is still trying to figure out how to properly extract and leverage data, while keeping its system intact and not interfering with users’ experiences. On a per-user basis, Facebook makes a small sum, roughly $1 in profit.

The relationship with Zynga will be especially important. The online game company represented 12 percent of Facebook revenue last year, according to the filing. However, estimated daily active users of Zynga games on Facebook fell in the fourth quarter, from the third quarter, the brokerage firm Sterne Agee said in a recent research note — a trend that could weigh on the social networking company.

Facebook also faces intense competition for advertising dollars, something it acknowledges in the “risk factors” section of its I.P.O. filing. While advertisers will likely choose to be on both Facebook and Google, they will inevitably compare results they get from both. Some analysts think Google may have the edge in such a competition.

Google users tend to be looking for something specific. This makes it easier for advertisers to direct their ads at potential customers, analysts say. “Visually, Facebook ads are eye-catching, but in terms of accuracy of targeting, they are not even close to Google’s ads,” said Nate Elliott, an analyst at Forrester Research. “A lot of the companies we talk to are finding it very hard to succeed on Facebook.”

However, the high level of interaction on Facebook could prove valuable to advertisers. “At Facebook, you are looking at people’s interests, and what they are sharing,” said Gerry Graf, chief creative officer at Barton F. Graf 9000, an advertising agency in New York that has used Facebook for clients. If Facebook becomes a place where people recommend, share and buy a large share of their music and movies, such a business could generate large amounts of advertising revenue, as well as any user fees.

“Facebook has become the biggest distribution platform on the Web,” said Daniel Ek, the founder of Spotify, a service that accepts only Facebook users.

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