Transfer Pricing Associates

Facebook Officially Announces Plans to Go Public

post Sunday February 5, 2012



As a follow up to our news article from January 1, Facebook has officially announced plans for an initial public offering (IPO) that could value the company between $75 billion and $100 billion.  With its near one billion users, Facebook in 2011 generated $3.7 billion in revenue and $1 billion in net profits.  Anyone familiar with valuations will tell you that these numbers in no way by themselves account for the $100 billion estimated value, so we are once again left wondering – how will Facebook justify the hefty price tag?

In our last article on Facebook considering an IPO, we speculated that advertising sales are at quite obviously at the forefront of Facebook’s revenue stream.  We also estimated that Facebook’s expenses, such as hosting the website, paying programmers, etc., are most likely small in proportion to revenues.  Both speculations have now been confirmed by Facebook’s release of certain financial information.  Although, as we explained before, to achieve such a high value, year-on-year revenue growth coupled with sustained low expenses are necessary (though the company’s intangibles also play a large role).  The anomaly is that given the current flat revenue structure of the business, growth in revenues required for such a high valuation would need to be increasing significantly year to year.  So, just how will Facebook achieve a high increase in year-on-year revenue growth?

One theory is that since Facebook has had so much success with online display ads targeted to users’ specific interests, the site may integrate a search function similar to Google’s.  This would mean two things: Facebook and Google’s battle over online user time will intensify, and Facebook would be able to make revenue in the same way that Google currently does – through enabling advertisers to deliver relevant ads targeted to search queries or web content to potential customers.  Although, one issue that would prove problematic for Facebook if it undertook this strategy is that turning information on users’ interests into increased sales to advertisers may raise serious privacy concerns.  One other issue facing Facebook is the future antitrust concerns if Facebook creates network effects to the point that it can create a monopoly or get so big that it can just buy out any start-up networking site that poses a competitive threat. [Source: The Economist]

Compared to other American technology giants, Facebook is actually priced on the lower side.  Google, for instance has a market capitalization of $190 billion, while Microsoft’s market capitalization is even higher at $250 billion.  Although, Facebook’s market capitalization value of $100 billion will only be possible if Facebook finds a way to capture the ownership of the 'content platform', which is a tricky issue due to privacy legislation in many countries. In addition, the underlying question on the value of Facebook is: does the value rest in 'its brand', in 'its technology platform' and/or in 'its content platform'?


To read our previous article on Facebook, please visit Facebook Considering 2012 IPO

photo courtesy of tungphoto

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