Facebook IPO: Should You Invest in Facebook?

It started as a small social media website that launched in a Harvard University dorm room. Now nine years later, with an estimated value of $100 billion and approximately 845 million users worldwide, Facebook is preparing for its Initial Public Offering for Friday, an IPO which Zuckerberg has announced that Facebook expects to raise up to $11.8 billion

The $11.8 billion profit goal makes this IPO the biggest one ever by any internet company. Facebook’s growth since its creation in 2003 has been nothing short of outstanding, with recent statistics showing that revenue rapidly increased from $777 million in 2009, to $3.7 billion in 2011, to over $1 billion in the first quarter of 2012 alone. 

Facebook, so far a private company where users access the website entirely for free, accumulates 85% of its profit from advertising, and the remaining 15% from social media games such as CityVille and FarmVille. Between January and September of 2011, Zynga reported a revenue of $828.9 million, bringing Facebook’s profit to a total of approximately $350 million. Even though the rate of growth in users and revenue that Facebook has experienced since its creation has been astoundingly fast, it has also slightly decelerated in the past few years, with a rate of growth of 154% between 2009 and 2010, followed by a growth of 88% between 2010 and 2011.

There are several factors involved that raise questions as to how worthwhile an investment in Facebook would be for interested buyers. These factors include Facebook’s slight revenue deceleration; its sole business model as a social media network, an identity that could quickly lose appeal in face of competition; the failure of Facebook, so far, to display advertisements on its mobile platform; an over-valued market worth; and what going public means for user satisfaction and privacy regulations.

Until recently, Zuckerberg made it clear that he intends to keep Facebook private and independent, especially by famously refusing Yahoo’s offer to purchase Facebook for approximately $1 billion in 2006, and then Microsoft’s offer for $15 billion. Zuckerberg has also always maintained that his primary concern for Facebook is user experience and satisfaction, with business interests seemingly a close second. 

As Facebook goes public, with looming quarterly reviews, market regulations, public pressures and the oversight of the U.S. Securities Exchange and government, these priorities could very likely reverse. With an increase in the amount of share-holders and parties involved in the way that Facebook is regulated, privacy regulations – one of the most contentious issues within the website – could also become affected.

Facebook revolutionized social media by making it necessary for users to disclose their real names and identities, and where doing otherwise constitutes a violation of the company’s policy. This demand for authenticity from its users created a sense of community and introduced a personal touch to the website that fueled the growth that we see today. However, Facebook is a one-model business, to be a social networking website. 

Facebook could very possibly be a fad that loses steam – as did fellow competitor Myspace, which up until 2008, continued to boast more users than Facebook.

Facebook's sixth S-1 filing with the Securities and Exchange Commission discusses several important items pertaining to the risks and rewards involved in buying stock from Facebook. One of the most noteworthy items on the report is the increase in the amount of users who access Facebook solely through their mobile devices. This poses a problem for Facebook’s advertisement revenue due to the fact that Facebook has not yet incorporated advertisements into their mobile platform. Even though Facebook announced at its first Marketing conference in Manhattan on February 29 that they will be expanding their advertisement platforms to reach mobile users, the changes are yet to be implemented. Statistics show that in December, 425 million individuals – comprising roughly 50% of Facebook’s users – actively accessed the website through their mobiles. At this rate, if 85% of Facebook’s revenue is made from advertisements, and over 50% of its users are accessing the website through a medium that displays no advertisements, Facebook’s revenue could begin to dwindle at rates that have yet to be seen by the company.

An important point that is worth mentioning when discussing the profit involved in investing in Facebook’s IPO, is that of the price/earnings calculation. Facebook is currently over-valued, with an estimated P/E calculation of approximately 206 on May 18, as opposed to Google’s 19 or Apple’s 12.7. The higher the P/E ratio, the more expensive the stock is in comparison to the revenue that it generates for the investor. This fairs poorly for any tentative investors.

On the other hand, Facebook has made very business-savvy decisions including buying into popular social trends such as Instagram, which was purchased (along with its 30 million users) at a cost of $1 billion, a mere 1% of Facebook’s capital. There are now also rumors circulating that Facebook will soon be buying the popular iPhone video sharing service, Viddy. Facebook has also successfully remained ahead of the social media game by emulating the small successes of fellow competitors. An example of this is Facebook’s news feed platform that was adopted once Twitter’s success took off. Another example is how Facebook enabled location services once Foursquare gained some success. Furthermore, Facebook presents a strong and unique appeal to advertisers, which has yet to be successfully followed by another social media network, and it is the mass amount of information that it gathers about its users, ranging from the where they are employed, what they like to eat, what entertainment they enjoy and where they travel.

Facebook, though it transformed the scope and power of social media, was not the first of its kind. Social media websites where user information and photos were shared and exchanged existed with the internet boom of the late 1990s and included sixdegrees.com, Friendster and Myspace. The idea of social networking existed before Facebook, and will expand beyond it. Coupling Facebook’s high stock-market value, its slowly declining revenue, the increase in users on mobile platforms who view no advertisements, and its status as a social media network, could make Facebook seem less than worthwhile as an stock purchase to interested investors. Facebook could well be just a passing fad which will be swiftly replaced by the next big network, making the prediction of its success in the near future difficult to assess and debatably unpromising.

How much do you trust the information in this article?

Selma Al-Samarrai

Recent McMaster University graduate with an Honours degree in Political Science and a minor in Psychology. Previous experiences include a 2-year employment as the Senior News Editor for McMaster's weekly student newspaper, The Silhouette and a writer for a technology blog. Interests include International Relations, Middle Eastern affairs and women's rights.

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