Is Facebook really worth $100bn?

The time has finally come for the internet’s biggest phenomenon to cash in
By Claire Ferris-Lay
Sat 11 Feb 2012 08:55 PM

We’ve all heard of it, and the chances are you are one of its 845 million active users. But does that mean you’ll be investing in Facebook? The social network, founded by CEO Mark Zuckerberg in his Harvard dorm room seven years ago, has been valued at $75-100bn while its initial public offering (IPO) is one of the most hyped flotations in years. But even those figures fail to impress some.

“It’s difficult to avoid the overwhelming conclusion that Facebook, at its IPO, will be way overpriced,” Mark Hulbert of MarketWatch writes in his most recent report on the social network.

“At its anticipated IPO later this year, Facebook will be three times more expensive than Google was at its IPO — nearly 40 times more expensive than the average large IPO of the last four decades,” he adds.

Hulbert is not alone. Thousands of column inches have been dedicated to analysing Facebook’s success as a publicly listed company since it filed its $5bn IPO registration documents with the Securities and Exchange Commission (SEC) on February 1 — the majority of which are unlikely to persuade the average investor to buy its stock.

The social networking site faces a slew of challenges as it looks to persuade its potential investors that it can make the transition from college startup (albeit a very big one) to a global giant that can stand the test of time alongside the likes of Apple and Google. Possible investors could include Prince Alwaleed, who said in an interview with CNBC that he would evaluate the stock once the firm goes public.

Zuckerberg, however, is confident that now is the right time. “We’re going public for our employees and our investors. We made a commitment to them when we gave them equity that we'd work hard to make it worth a lot and make it liquid, and this IPO is fulfilling our commitment. As we become a public company, we’re making a similar commitment to our new investors and we will work just as hard to fulfill it,” he wrote in his 2,173-word statement of intent.

A $5bn flotation would not only make Facebook one of the largest technology companies in the world but would also turn around 900 of its staff — including longtime employees and a graffiti artist who once painted Facebook’s office walls — into paper millionaires. It will also mean that its founder, who owns a 28.7 percent stake in the firm, will be worth $26.15bn.

That said, Facebook doesn’t need to float. As Zuckerberg says clearly states, the main reason is to allow investors to cash in on a portion of their earnings. Investment banks and financiers — set to make around $500m in fees from the filing — will also be pushing for a massive IPO.

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“It's been one of the most hyped IPOs since Google went public [in 2004] and shows how important social networks have become to mainstream consumers as well as the fact that there is a lot of profit to be had in that market,” Michael Gartenberg, research director at US-based technology research firm Gartner says.

In the seven years since its inception Facebook has emerged as one of the world’s most dominant online businesses. In the US and the UK, more than half of the population is using Facebook while some 250 million photos are uploaded onto the site on a daily basis.

One out of every seven minutes spent online is on Facebook, according to the research firm comScore. In the Arab world its popularity has been no different to anywhere else in the world.

Users in the region totalled 21 million in 2011, an increase of 78 percent compared to the same period the previous year, according to research by the Dubai School of Government.

Documents filed to the SEC reveal for the first time the financial impact these staggering figures are having on Facebook’s bottom line. Last year, the Massachusetts-based firm recorded sales of $3.7bn and made a net profit of $1bn — not bad for a firm whose founder describes it as “not originally created to be a company”.

The case for Facebook’s multi-billion-dollar price tag rests largely in its ability to continue to grow its market share and in turn the number of people advertisers can sell their products to. In its SEC filing, Facebook says it aims to connect to the world’s two billion internet users. “The size of our user base and our users’ level of engagement are critical to our success. We aim to connect all of them.”

Brazil, India, Russia, Japan and South Korea were all highlighted as huge areas of potential growth. Facebook uptake in Brazil, for example, grew 268 percent last year compared to 132 percent in India while less than 15 percent of internet users in Russia, Japan and South Korea have Facebook accounts.

The social network’s biggest problem as it looks to grow its business will be tackling China, a country that represents both its biggest challenge and its greatest opportunity. In China, where Facebook is currently banned, around half a billion people are estimated to use the internet but just a tenth of one percent are on Facebook. Declining growth rates in more mature markets where many users have already signed up for accounts and in new countries, where access to the internet is limited, are also problematic.

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“[Facebook] needs to show both continued growth in terms of users as well as a maintaining longer user engagement with the service,” says Gartenberg.

Tapping into advertising via mobile phones will be key to Facebook’s long-term financial success. Around half of the website’s current users access it via mobile devices yet the site still carries no mobile advertising. Concern over the lack of mobile advertising has prompted speculation that it will be forced to launch a new mobile advertising platform before its IPO.

“More and more people use the mobile application or mobile version as their primary Facebook medium and thus do not get the full “PC” experience where the new features typically get premiered. In fact many users do not even own a PC,” says Chris Jones, vice president and principal analyst at California-based Canalys.

Advertisers — those that form the bulk of Facebook’s revenues — have been quick to offer their thoughts on mobile advertising. WPP boss Sir Martin Sorrell’s “fundamental doubts” about the extent to which social platforms such as Facebook can be monetised, is an opinion shared by many in the advertising industry.

“The challenge for Facebook is finding the balance between satisfying their future shareholders with their rapid revenue growth and their users. The latter, judging by reactions to previous changes Facebook has made to their site in recent times, may be resistant to the idea of being bombarded by advertising on both desktop and mobile platforms,” says Elie Khouri, CEO of Omnicom Media Group MENA. But, if Facebook does manage to “create the perfect formula”, he adds, it “could be set to uncover a revenue goldmine”.

Advertising concerns aside, most analysts are concerned about the pivotal role its founder will continue to have in the company. The 27-year old Zuckerberg will retain an unusually high 57 percent of the voting power, giving him an almost unheard of concentration of authority, which even Facebook admits could be a risk factor:

“So long as the outstanding shares of our class B common stock represent a majority of the combined voting power of our common stock, Mr Zuckerberg will be able to effectively control all matters submitted to our stockholders for a vote, as well as the overall management and direction of our company,” the firm said in its filings.

While there is no doubt that Zuckerberg has managed to create one of the most powerful online businesses in just seven years, his ability to continue to grow the company whilst keeping its shareholders happy remains to be seen.

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