Facebook is going public in an initial public offer (IPOs) that is likely to value the social networking company at between $75-100 billion.
The Facebook share sale is the latest in a series of high-profile tech IPOs: Apple in 1980, Microsoft in 1986, Netscape in 1995, Amazon in 1997 and Google in 2004. Each of these IPOs was a landmark deal that caught the mood of the moment. For example, the Apple IPO signaled the beginning of the personal computer era. The Netscape IPO was perhaps the trigger for the dotcom mania that followed. Is the Facebook IPO the harbinger of the next, next thing?
When Facebook goes public. Photo: Bloomberg
The IPO filing also gives a glimpse of Facebook’s financials for the first time. Facebook in its filing said it posted $3.7 billion in revenues and $1 billion in profits in 2011, almost three times the sales and 10 times the profit that Google had while getting listed in 2004. Back then, Google had $961.8 million in revenues and $105.6 million in profit. Though this gives an impression that Facebook is much better off then what Google was while filing its IPO, the comparison is an unfair one. Google went public in the fifth year of its growth trajectory while Facebook is going public in its eighth. Comparing their revenues and profits at the same time in their history would paint a different picture.
In 2008, the fifth year of its existence, Facebook posted revenues of only $272 million and lost $56million. Google in its eighth year (2006) posted revenues of $10.6 billion and profits of $3.5 billion which is comparable to Facebook’s revenues and profit for its eighth year.
But the similarities end there. Google grew at the rate of 118%, which is faster than what Facebook did in 2011, and continued its growth trajectory of over 90% and 70% for the year 2005 and 2006. It would be difficult for Facebook to have a similar growth to justify its high valuations.
Facebook’s ad revenues have been falling over the years. Ad revenues accounted for 95% of Facebook’s revenues in the financial ending year 2010, but fell to 85% in 2011. The prospectus filed by Facebook mentions that the reduction in spending by advertisers with Facebook could seriously harm its business. Another big risk Facebook lists in its IPO filing is that users are increasingly accessing it through mobile phones. Facebook indicated in its S-1 filing that 425 million monthly active users are mobile and since it does not currently display ads in this medium, it may negatively affect revenues and financial results.
The social networking giant does not need the $5 billion it plans to raise from the IPO; it already has $3.9 billion in cash reserves. It seems the shares are being sold to the public for reasons not related to its financial requirements. The sole purpose the Facebook is going public is to gratify its investors and employees and to meet the US regulation which makes it mandatory for a company to go public when it reaches $10 million in assets and/or 500 shareholders, including those with stock options.