According to multiple sources, Facebook’s long-awaited Initial Public Offering (IPO) is set for May. The social network is looking to raise $10 billion based on a valuation of $100 billion. If it stands, this will be the highest valued IPO in history. Will it also be the most successful? If so, here’s why.
Mark Zuckerberg created Facebook to be a college student-only social network and opened it up to the public in 2006. Over the years, the site has developed a number of innovations like apps, mobile apps, customized ads, and the HTC Status (a cell phone with a Facebook button on it), all of which have helped diversify revenue streams and add value in advance of an IPO.
Facebook's decision to finally come to the market with an IPO shows it is confident in its ability to generate income, which totaled almost $4 billion in 2011. It is confident that market volatility will not treat it like Groupon, which is down significantly since its IPO was offered in fall of last year. Facebook also seems confident that the economy is on the rebound, as no company wants to go public in the middle of a recession since investors are more hesitant to invest in a less sure thing than they would be in a more prosperous time.
TBG Digital, Facebook’s marketing firm, recently released a report on ad revenue generated by the social network. Some of the finer points: Cost Per Click (CPC) has risen 10% in the U.S. and 11% in the UK. Cost Per Thousand Impressions (CPM) has risen 23%. Click Through Rates have risen 18%, led by a 100% increase in France.
Two great leading indicators in terms of how to expect Facebook stock to perform are Zynga, a digital games developer, and Google. Zynga develops games including Farmville and Mafia Wars for users on Facebook’s platform. Google serves targeted ads which are based on search results similar to how Facebook targets ads based on profile information.
Zynga went public last month at $10 a share; it has since dropped to $9.05. The digital games developer derives almost all of its revenue from users of its Facebook games. While its revenue rose 80% year on year to $306.8 million in Q3 2011, its income dropped 50% to $12.5 million. The drop in income is likely due to IPO-related expenses and should not carry over to the next quarter, thus resulting in a rising stock price.
Google, by comparison, raised $1.9 billion in its IPO in 2004. It still ranks as the largest internet IPO of all time. It was initially priced at $85 and has since risen significantly, currently priced over $625 a share. Google’s revenue is generated by Google AdWords, which serves customized ads to the world’s largest audience based on what they are looking for on the internet. The revenue model has been so successful that Facebook more or less copied it and now provides a similar service at a 45% cost reduction, according to TBG, to its users.
Facebook’s IPO is literally the monetization of a social network that has been unable to be realized by MySpace, LinkedIn, Twitter, and others. It is the realization of the great conundrum of the Internet, how to turn traffic into money. No one has done it as well as Facebook. No one is as relevant as Facebook. No one will do it better.
Photo Credit: Guillaume Paumier