Business Times

Facebook or '$FB' by the numbers

By Jagdish Hathiramani

A proposal was filed with the US Securities and Exchange Commission this month for what is arguably the world's highest profile Internet IPO since Google's in 2004. Google currently trades at around the US$ 600 per share mark and it is likely that the 850 million strong social network Facebook (soon to be $FB), which also has 1.2 million subscribers in Sri Lanka as of end-December 2011, could one day also reach these dizzy heights.

But what do we know about Facebook? Thanks to the company's recent 150 page SEC filing, quite a lot now. Finally, potential retail investors, and by extension the general public, have the opportunity to look behind the scenes at a company which will, undoubtedly, soon become officially ranked as one of the biggest in the world.

The numbers
Facebook is currently flirting with a valuation of between a US$ 75 billion to US$ 100 billion post IPO and, according to a report issued by New York-based researcher PrivCo, shares could be made available at the US$ 38 - US$ 40 per share price range (while others have anticipated a high of US$ 45). This can be compared to the SEC filing that estimates shares to be worth US$ 29.73 as at December 31, 2011. PrivCo further noted, and several other sources agree, that the IPO could take place as soon as the end of spring 2012 (May) and will most likely involve a New York Stock Exchange listing.

Unlike recent Internet IPOs (LinkedIn, Zynga, Groupon), Facebook at least comes from a position of strength in that it has been a profitable company for three years. Its 2011 revenues were US$ 3.7 billion, an 88% year-on-year increase, with operating income at US$ 1.75 billion and net income at US$ 1 billion. On the other hand, analysts are quick to point out that these numbers were much lower than the anticipated US$ 4.27 billion that some had projected; with Facebook itself warning potential investors that continued high rates of growth would be unlikely given 60% market penetration for its primary US and UK audiences. However, PrivCo suggests that Facebook could sustain its revenue growth, at least for the coming year, and suggests that the company may even break the US$ 7 billion revenue mark in 2010 (importantly, this projection was made prior to the SEC filing reporting 2011 revenue at US$ 3.7 billion).

However, while Facebook's profitability is undoubtedly rising, 2011's US$ 1 billion in profits was due to a 65% year-on-year increase, its costs are likewise ballooning. An example is the company's research and development expenses ballooning to US$ 114 million in 2011, up from US$9 million in 2010. This was mostly due to an uptake of more than 1,000 new employees, and related compensation. Further, there is the issue of post IPO compensation up to 2013, which is estimated at US$ 2.5 billion, 10 times higher than 2011 compensation numbers. A situation that some are calling untenable since costs are seen as growing much faster than profits.

On the other hand, it is also worth noting that, while Facebook has so far relied almost exclusively on online advertising for revenues, there are many new forms of revenues that remain as yet unrealised, even with subscriber numbers expected to grow much slower than previously. Currently, online advertising accounts for 85% of all Facebook revenues, down from 98% during the 2009/2010 period, with the number of ads growing between 2010 and 2011 by 42% and the average price per ad also increasing by 18%. At the same time, revenues from social gaming now account for US$ 557 million of its revenues (12% of all Facebook revenue was earned from Zynga which is known for Farmville and other game brands and which makes its money selling virtual goods), which is up from a virtually insignificant sum in 2009

Additionally, out of Facebook's 850 plus million members (up over 30% year-on-year), more than half (483 million) visit the site daily, and this has resulted in more than 100 petabytes (100 quadrillion bytes) of photos and videos stored to date as well as an average of 2.7 billion "likes" and comments added daily, as per data collected during the last three months of 2011. This immense resource has unprecedented possibilities in terms of content generation, consumer behaviour information and brand knowledge at the bare minimum.

Also, analysts say that Facebook's existing marketing model is extremely simplistic and it has to become more sophisticated in using consumer data to more effectively target advertisements and get clicked if it wants bigger clients to stay with it for the longer run. Currently, Facebook counts 96 of the top 100 biggest US advertisers as top tier clients.

The shares
While the buzz about Facebook may be unprecedented in recent years, the feedback from analysts regarding the company's prospectus has been anything but exciting. Some suggest that this may have even been tempered by a slew of disappointing Internet IPOs in recent months, including LinkedIn, Zynga, Groupon, etc. Others point to the possibility of limited growth prospects which may mean that Facebook may take a long time, if ever, in attaining Google's trajectory.

And that's not even the biggest problem facing would-be investors. Even if they choose to take the gamble, shares might be very hard to come by with most of the issue earmarked for employees, underwriters, etc and the rest likely to be snapped up quickly by institutional investors and private equity funds. And this is even if Facebook goes higher than its currently stated US$ 5 billion IPO goal, which many believe is just a "placeholder" for the real number which will be revealed closer to the IPO date.

Even those getting their hands on Facebook shares will not be immune and it is likely that, following the example of LinkedIn, Zynga, Groupon, etc, shares will peak and then free-fall almost immediately following their stock exchange debut. Both Zynga and Groupon currently trade below their IPO prices, with only the 150-million member LinkedIn trading at a price (US$93) higher than its US$ 45 November 2011 IPO price. Incidentally, LinkedIn is also the only Internet firm embarking on an IPO that was profitable in 2011.

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