From humble beginnings in his Harvard dorm room in 2004, CEO Mark Zuckerburg’s plan for world domination looks set to take a new twist next year. Speculation has reached boiling point and the eyes of traders are alight at the possibility that Facebook may finally be in public hands. That is, of course, if reports are correct in stating that the 800 million strong social network will make an initial public offering (IPO) of shares in early spring 2012.
Facebook Inc.’s initial public offering would look to raise 10 billion dollars, which would value the social networking super giant at more than 100 billion dollars, 43 billion less than internets golden child Google Inc.
Considering that Facebook’s reported revenue for 2011 will top $4.3 billion, $2.3 billion up from the previous year a planned floatation would be at roughly 25 times the revenue. This is revenue we’re talking – not profit, although companies with such rapid growth do generally fetch much higher price to earnings ratio. To put this into perspective a healthy UK company would be typically valued at 5-10 times its net profit.
When considering Facebook’s real valuation, we need to take a close look at its revenue streams. Much of the reported $4.3 billion the company made in 2011 is made up of Facebook’s advertising model, though $468 million was made accounted for by the purchase of Facebook credits. Interestingly, that makes the revenue it generated from Facebook credits 4 times higher than in 2010.
But as the world economy is far from out of the woods and with the European economy in crisis, can Facebook sustain its year on year growth – the very growth that warrants such a valuation? Just as importantly, can it really continue to attract new users at its current rate?
Mark Zuckerburg himself has already identified the need to create new revenue streams and with certain music/video sharing updates we can kind of see where this might be heading. There is also the long-standing rumour that Facebook will start to charge its users, a rumour rubbished by many.
With all this in mind I have come to the conclusion that any investment made would only ever deliver a minimal return at the $100 billion valuation, if any. As we are all aware, with technology companies the right time to make an investment is at the beginning when the risk is high but the reward is great.
Should Facebook become public, the ultimate winner would be Mark Zuckerburg, with the move reportedly set to take his net worth to a $24 billion, putting him ahead of Google founders Larry Page and Sergey Brin.
