Facebook IPO: Not the Next Google
Today will be a great day for hoodie wearing Facebookers everywhere. Facebook (FB) is going public and expected to price at $38 a share, valuing the company more than $100 billion. This will place Facebook in the top 40 companies by market cap.
Facebook's stated mission is to make the world more open and connected. The strategy has been working so far which has created a fair amount of excitement in the IPO.
Below are some of the key stats from Facebook Amended S1:
Facebook has 901 million monthly active users (MAUs) as of March 31, 2012, an increase of 33% as compared to 680 million MAUs as of March 31, 2011. And 488 million MAUs used Facebook mobile products in March 2012.
The users stats and growth are impressive. Facebook is huge. But translating users into revenue isn't easy. All of these users are happily interacting with friends and sharing photos. The last thing that many users want to do is work on a "virtual farm" from Zynga (ZNGA), which is profitable for Facebook. Many have to date played the game - but will the continue? Facebook generates 15% of its revenue from Zynga. From the S1, "If Zynga does not maintain its level of engagement with our users or if we are unable to successfully maintain our relationship with Zynga, our financial results could be harmed".
Not sure if more people will be growing virtual farms in the future but a reasonable investor may see some risk here. The rest of the revenue is generated from advertising which has proven to be a tough business for most, including Google.
Many retail investors who aren't selling shares in the IPO like Facebook insiders and Goldman Sachs (GS) are looking to buy some shares to pick up the "next Google". You might want to review the performance of some of the recent technology IPOs before trying this.
When Google (GOOG) went public, revenue and profits where growing and there were hundreds of thousands of businesses that used Google AdWords to build their businesses. Businesses could buy ads on Google and generate leads or sales with a proven positive ROI. The data for Facebook advertisers is much less convincing at this point. Just ask General Motors (GM).
In addition, Google priced at a much lower valuation, even though the business model was arguably more stable and growth rates were higher. You can see this in the Google chart below.
Facebook said, "we expect our rates of growth will decline in the future. We believe that our rates of user and revenue growth will decline over time. For example, our revenue grew 154% from 2009 to 2010, 88% from 2010 to 2011, and 45% from the first quarter of 2011 to the same period in 2012."
Google's IPO generated huge profits for retail investors that bought the IPO at $85 a share. This was made possibile by the amazing business performance after the IPO. Google continued to expand revenue and profits at a rate of more than 50% after the IPO.
If you feel like you need to be a part of the Facebook IPO, go ahead and buy but keep in mind that you aren't buying the "next Google".