Exclusive: Does Facebook’s IPO Make Good Business Sense?

    February 4, 2012
    Abby Johnson
    Comments are off for this post.

Companies file for IPOs all the time, but the recent filing by social networking giant Facebook has seemed to connect with nearly everyone, and in a big way. On Wednesday, Facebook filed for its IPO in hopes to raise $5 billion or more, which would make it the largest initial public offering from an Internet or technology company.

Facebook is unique in that its users have played a significant role, if not the most significant role, in what it is today. According to its S-1 filing, Facebook has 845 million active monthly users. Due to this widespread user base combined with the nature of Facebook, the news of the IPO has been particularly intriguing.

Users are excited because they feel a special connection to Facebook. While it is substantial news, there are some issues being raised about it from a business perspective, particularly over its estimated valuation.

Is Facebook worth $100 billion? What do you think?

Francis Gaskins, Partner and President at IPODesktop.com According to Francis Gaskins, President and Partner at IPODesktop.com, the past 4-5 quarters are very indicative of its future. Based on the information that was released in the filing, he does not think $100 billion is a reasonable valuation for Facebook.

“At $100 billion market cap, Facebook would be selling at about 53 percent of Google’s cap,” he said.

As he explains, Facebook’s revenue in 2011 was $3.7 billion. Google, on the other hand, had revenue of $46 billion, which is more than 10 times the amount of Facebook’s. Given this data, Gaskins doesn’t see how Facebook is worth 53 percent of Google.

Gaskins also points out that the past quarters are telling of the company’s rate of growth. He told us he was “quite surprised” when he saw the details.

“[If] you look at what happened for December 2010, March, June, and September of 2011, oddly enough, what you will find is the operating earnings were flat,” he said. “The net after tax earnings were flat, and the margins – the profit margins – went down.”

He believes the $100 billion valuation points to the ego of Mark Zuckerberg as well as the fact that Facebook is falling into the trap of believing their own press releases, a move that he calls “very, very dangerous.”

“The credibility of management’s forecast is very, very important,” he said.

Gaskins told us that Facebook didn’t have a solid strategy for being profitable that would appease Wall Street, especially since its revenue was flat even without any real competitors. However, now that Google+ exists and is appearing to gain ground, he said that Facebook’s current projections could really hurt it. He believes that Facebook should have filed its IPO last summer when it was the only player in the space.

Another issue he sees from a business perspective is how Facebook is defined.

“It’s not a technology company,” he said. “It’s a consumer of technology, which is different. They’re offering a service, and they’re not selling technology.”

Facebook is, however, an Internet advertising company like Google. According to Price Waterhouse, the yearly compound growth rate for Internet advertising will be 12 percent through 2015. So, at this rate, it doesn’t translate into high multiple market growth for Facebook.

With these revelations and others being analyzed, the social giant will likely face a lot of scrutiny. What’s bad is that Facebook is about to enter the quiet period, which means that it will not be able to respond to the negativity.

On the bright side, Gaskins did say that Facebook’s IPO would have a positive impact on the economy.

“It’ll definitely help the economy because there will be a lot more money flowing around in the tech area,” he said.

  • http://www.LAokay.com Steven G

    I think when a company goes public they have this kind of duty to try and squeeze every single dollar of profitability out of it instead of letting things go the course. Many companies that go public become more about it’s stock price than about what the company actually does. Google is a fine example of that. Do we really need Facebook to become that as well?

  • Reddy C

    Is Face Book Really Worth all that Buzz
    A lot of buzz and talk is going the Face Book raising the capital through IPO, after listening to the news on the Radio, Television and other media made me to write this piece of analysis about the Face Book and other Social media sites like Linkedin etc.,
    First analyze what is Social Media Web site:
    They have only members, who are people that is all. They do not have any inventions, patents or even basic research team of the products like Apple, Kodak or any other first inventions kind of things. Even Google has got its search engine algorithm and Microsoft has its operating system, what Face Book has?
    These web sites may project that they changed the way people communicate each other, even before these media people were communicating effectively by the media or other means that were available at that point of time, for example M K Gandhi mobilized people in of whole India with the media available at that point of time. So tomorrow there could be another easy media or process that could be available.
    Secondly Face Book identifies itself with 840 million members, Do anybody know what demographics they come from, for most members on its site the average share price of face book $89 is one month to three months salary may be.
    So an organization without Materials, Machinery and Products how could it be worth that much. I pity those pioneered companies like Eastman/Kodak are to be declared Bankrupt with so many inventions and patents.
    What is Each Member Worth:
    So based on the above observation that Face Book has got only members as its strength, so it needs to keep them with the organization, any company to keep their talent or assets they offer goodies assign a value to its members, here the talent means members not the software development teams etc.,
    An example here is what happened to the My Space another social media web site which could not keep the members with them, they have to close down. The similar situation may happen to Face Book as well. I will come to that at last how it could happen.
    What each member worth: These values are projected in the Media
    Total Membership: 840 million
    Face Book Value: 100 Billion
    Each member if they are share holders: $119 it is a lot of money for each member especially those from the third world country members, so the Face Book need to distribute this money to keep the membership.
    And say each member has a share in the company if the Face Book makes the profit of 1 Billion every year after tax profit each share holder gets $1.20 dividend, which again a good amount.
    If I am not wrong after this IPO many initial shareholders of Face book convert their shares into real cash.

    Threat to FaceBook:
    A simple social media web site where each member joined would be Share Holder philosophy could shift or change the dynamics of the Face Book. Where share holders are the Software engineers, Developers, organizations, Individuals etc.,
    A social media web site where individuals can register based on their talent and skills and get proportionate shares based on their contribution to development and profitability of the web site would be successful and every member gets benefit by being member of such social media web site when such media belongs to everybody.
    It is as simple as that, if you give some incentives to the members all the members would register with you and in turn member make the company successful and get rewarded as well. Instead of making only some individuals Rich.
    So Face book it is your members who deserve the dividends/benefits and not the promoters or initial shareholders.
    So what stake you have got for members in your company and how they benefit being the member of your Company?
    Readers post your comments and analyze, also highlight if I am wrong in my analysis, Vote on the above Agree/Disagree.

  • big a

    FB should pay the 800 mil uses a commission for using the site. it’s us the made fb what it is. It’s more like Z owes us.