Will the Stock Market Kill Facebook?

Wall Street imageAs Facebook prepares to become a publicly traded company, there is speculation that it will be the largest internet initial market offering (IMO) ever, with the social networking giant seeking to raise at least $5 billion dollars. The impending floatation is creating equal amounts of excitement and cautious trepidation.


While the Facebook IMO will certainly financially trump both Netscape's and Google's earlier venture into the stock market, it should be pointed out that although the company may be currently bathing in the glow of hyper-growth, this may not last forever. Take Google for example...

 

Google Statistics


Google's stock price is down 8% this year, to $596, following a disappointing fourth-quarter profit. This is still 20% less than its 2007 peak of $741. Despite more than doubling revenue and profit since the top stock price of 2007, Google's share values continue to fall. Remember, this is a market-leading giant, with a well-established advertising system (Adwords and Adsense) in place, generating huge profit for the company. Yet its stocks continue to fall in value.

 

Should Facebook be worried?

Facebook has over 800 million active users and they have yet to be truly monetised. The company has also moved into the online advertising market and its Facebook Ads are continuing to prove successful, albeit, not without harsh criticism from Facebook users.

One area that is growing, but eluding monetisation is mobile users. Around 425 million monthly users (on average) access Facebook via smartphones and other mobile devices. This was such a concern that Facebook actually included the fact in its IMO prospectus. However, this is still a potential resource if the Facebook team can implement some method of mobile monetisation.

Before condemning Facebook's future as a publicly traded company, we should take a closer look at what Facebook is bringing to the table.

Look How Big My Facebook is!

Facebook collected $3.71 billion in revenue last year. This is an increase from $1.97 billion in 2010 and $777 million in 2009.

What aided this 88 percent growth rate from 2010 to 2011? A 69 percent increase in advertising revenue. Delivery of adverts increased 42 percent, with an 18 percent increase in the price of ads delivered. Facebook's advertising revenue in 2009 was $764 million. In 2010, this increased to $1.87 billion. Last year saw Facebook's advertising revenue rocket to a massive $3.15 billion.

The U.S. continues to be the major source of Facebook's wealth, responsible for 56 percent of all advertising revenue earned by the social networking company. Zynga, the games company behind Facebook games such as Farmville and Mafia Wars, accounts for 12 percent of Facebook's overall revenue. This is an increase from less than 10 percent in 2009 and 2010.

Revenue from payments and other fees has also dramatically boomed. 2009 saw a revenue of only £13 million. 2010 showed more promise and highlighted the sudden hyper-growth of Facebook, with revenue gained from payments and other fees steeply rising to $106 million. But it was last year which truly displayed the snowballing brutality of Facebook's domination of the social networking market, with a mammoth rise in revenue to $557 million.


Will Facebook Stay Afloat in the Stock Market Seas?

You may still be confused; after all, on the one hand, we discussed the steady decline of Google's share prices, but then evidenced the rapid growth of Facebook's revenue and user base. To make matters worse, we will now look at Facebook's net income.

Net income is a truer representation of a company's success. Liken it to a powerful sounding car: It may sound fantastic, but is this just clever engineering manipulating the sound to make the car more appealing to potential buyers? Net income allows us to lift the bonnet and see what's inside and discover if the engine has any real substance.

Facebook's net income was $1 billion, last year. What this shows is while the social networking giant may have earned $3.71 in revenue; only $1 billion was actual real income, once deductions such as tax and other levies were subtracted. This indicates a slimmer profit margin than many people believed to be the case.

However, $1 billion is a vast increase from the totals of $606 million in 2010 and $229 million in 2009. Add the fact that Facebook is currently embracing $3.91 billion in the form of cash and cash equivalents and it is clear that the company is currently undergoing a huge boom.

So while Facebook may not be as wealthy and profitable as many believed, the company is hardly poor. In fact, it is growing at an expediential rate and this factor is more important to future success than its current financial wealth.

Facebook Like
Will a Publicly Owned Facebook Affect Users?

Now we get to the question Facebook users may be pondering: Once Facebook is responsible to shareholders, will the quest for profit impede its future as a user-driven network? Or, importantly: Will greedy shareholders demand the site is bombarded into subjugation with the implementation of countless money generating schemes?


Will Facebook be forced to?

  • Display ads everywhere like an ugly free website?
  • Create affiliated links in user posts?
  • Bombard user inbox's with third-party spam?
  • Introduce a charge for Facebook games? Or, more cruelly...
  • Implement a Draconian monthly subscription fee for Facebook itself?!

In reality, none of the options above are likely to occur. But many users seriously believe making Facebook answerable to shareholders will have a detrimental effect on its future as a free service. The growing concern of users has even forced publicity shy Facebook Overlord, Mark Zuckerberg, from his secret lair. Mr. Facebook has made numerous public statements in an attempt to calm the nerves of Facebook users, promising that the aim is to make money to improve social enjoyment and not the other way round.

We will see.

In all honesty, Facebook will survive is transition into a publicly owned company. It's too monstrous and too integrated into everyday lives for something as trivial as a stock market flotation to slow its hyper growth anytime soon.

But will Facebook suffer Google's fate of continued share price decline (Google still recorded a revenue of $37.9 billion in 2011!)? The answer depends more on how the company is managed, than whether it is publicly owned or not. For the time being, it's unlikely the site and its users will be affected by this move.

As for the future, only time will tell.

 

*(Facebook financial statistics are courtesy of Inside IPO)


Tags: Facebook  Facebook IMO  facebook IMO  facebook imo  facebook stock market  facebook users  facebook shares 



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