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With the wheels finally in motion on Facebook’s IPO, the media has gone into meltdown over the billions Zuckerberg and his team stand to make from floating the company.

Facebook is looking to raise $5bn, but there's a tantalising possibility that demand for the stock could drive the figure closer to $10bn.

But looking past all the eye-watering numbers being bandied around, can Facebook actually justify such an enormous valuation? What does the IPO mean for other tech companies?

We've gathered the views of several industry experts to discuss whether Facebook will actually live up to the hype.

Facebook's revenue was less than $4bn last year. What justifies a $75bn - $100bn valuation?

Jos White, co-founder of Notion Capital: Valuation is all based on future growth and potential. The bulls will tell you that they will do more than $8bn this year and continue 100% growth for some years to come, which is phenomenal for company of this size.

The argument is that Facebook will be the advertising platform of the 21st century because of the size of its user base, the level of engagement and also the far reaching nature of the platform across its website and applications.

The case against Facebook is that its has is a 'one size fits all' approach for social networks and people will want different tools for different things - family, friends business, sharing, communicating and such.

Plus, how does it start to commercialise more of the Facebook experience and gather more of our data without putting off users with concerns in this area - especially with regards to privacy.

It is going to have to tread a very fine line and there's definitely a risk that a large percentage of the user base could either move on or become less engaged.

Nick Hynes, CEO and co-founder of Somo: Facebook has market dominance; it has reach, velocity and gorilla status. It seems to be unstoppable in terms of user acquisition.

While country-specific social networks have been enduring in some areas, Facebook has overtaken market leaders in Poland, Germany and the Netherlands, to name just a few, and will soon be the most widely used network in Brazil.

There are ample opportunities across developing nations as mobile internet becomes the primary access point for information. As it approaches 1bn users, with significant numbers of members using mobile as their preferred point of entry, Facebook's in an excellent position right now.

Steve Richards, MD at Yomego: Many people find it surprising that the valuation is at such a high multiple of actual revenue. The valuation puts Facebook's worth at more than Yahoo or Dell for instance.

This is partly because of the potential the market sees in Facebook - it seems like the company is driving the direction of the web, and investors want to be a part of this. 

Ged Carroll, digital consultant at Ruder Finn: The valuation is based on people's perception of future earnings. It reflects a confidence in the investment and that the investors think the business has a substantial amount of potential for growth. 

Andrew Girdwood, media innovations director at Bigmouthmedia: I think there are questions around whether the higher valuations are justified. However, there are certainly some pointers as to why $100bn is being thrown around. 

The main reason is its potential - Facebook has a commanding market dominance in an area that can only grow.

The current valuation certainly contains large chunks of what Facebook could potentially do in an expanding world of social media, social data enhanced real time bidding, convergence and with large numbers of new internet users coming online, often by mobile, from developing markets.

Secondly it’s driven by fear, as it’s hard to imagine another social network toppling Facebook. Some investors might see Facebook as the new place to move their money to and the IPO as the best time to do it.

The third reason is the investor’s reputation – with digital being so important to today’s companies and economies some investors will worry to be seen as missing the Facebook boat.

In your opinion, is it a good investment? Why?

JW: I think a large proportion of the value has already been created as a private company. It delayed going public and stayed private much longer than the previous generation of tech companies.

This is good news for founders, venture capitalists and private equity investors, but I think it means there is less value to be added as a public company. It could be an ok investment, but not a 4-5 times your money type of investment.

NH: Yes. The potential for revenue growth is complementary to the current valuation multiple.

The launch of Facebook mobile advertising will make the network one of the biggest publishers overnight, with an engaged audience of more than 400m people worldwide.

Mobile and particularly Facebook apps are where consumers are spending increasing amounts of time as smartphone penetration only increases. 

SR: Possibly. Yes, with an audience that big, there is huge potential to make money and integrate with sophisticated social CRM to deliver ROI.

The IPO will provide cash for diversification. But audiences are fickle - one or two PR disasters, especially around privacy - and Facebook could lose its luster.

Aggressive activity from Google+ might help to shake the foundations. 

GC: Well I won't be looking down the back of the sofa to find money to invest. This IPO is likely to be aimed at and bought by large financial investors, they won't be letting it go to 'Joe Public' until they have made a decent return from their investment.  

AG: If you take the investment strategy of “only invest what you can afford to lose” then this looks like a good investment, because Facebook will survive.

It will likely start to pay a dividend fairly soon and, in the meantime, you get to be a Facebook investor with all the insight that will bring.

Are we headed towards a new tech bubble?

JW: I don't think so. With Facebook's revenues, margins and potential the price can be justified, but I'm not sure this is ever going to be a company worth 4-5 times as much in a few year's time like Google.

NH: No. It is the sign of media market value shifting to online from offline. We might be worried if it was the number four in the market seeing this valuation, but Facebook is number one. 

SR: Possibly. Although some lessons will have been learnt from the first bubble.

GC: I don't think so. Since Sarbanes Oxley, an IPO is no longer the easy step it used to be for technology companies. In many ways tech CEOs would find it far less desirable. Look at the way Amazon goes up and down on share price as Bezos makes long term investments.

It is very hard for CEOs to resist the market dictating a 90-day strategy based on quarterly reporting.

I thought that the voting block that Zuckerberg has built up was quite interesting and his letter attached with the paper work tried to ensure the company will take a longer term view. Only time will tell.  

AG: I don’t think so. The original tech bubble had people investing money into companies that would never make money.

That’s not going on here. Facebook makes money. This is a sign of the rapid evolution of the landscape.

There will be companies that will be overvalued and other companies that will be undervalued during this time of change, but that does not make it a bubble.   

Which other companies will Facebook's IPO affect the most?

JW: Facebook will become the bellwether for a new generation of social network type companies with huge user bases. They will all to some extent be influenced by this and do better when Facebok does well - and visa versa.

But generally it is good for all companies in the space as long as Facebook is doing well, since it paves the way for everyone else.

NH: Google, Amazon, eBay, and any other player that is a single-service offering to mass market is at risk of being disintermediated.

SR: Companies that have grown on the Facebook infrastructure. From apps and marketing companies like Buddy Media and Wildfire, to games developers like Playfish and Zynga, they're all likely to be impacted most if the IPO is unsuccessful.

The IPO will give Facebook a massive cash injection and it will be interesting to see where the company chooses to focus its spending.

However, for brands and companies using Facebook for marketing and to build their communities, it is likely that the move will mean Facebook will begin trying new ways of extracting income from these advertiser relationships as it begins to face pressure from investors to live up to its gargantuan valuation.

Control of future direction will need to stay with those who know best, not necessarily the shareholders. 

GC: Zynga is the one that stands out because it accounts for something like 12% of Facebook's revenue. Its share price bottomed out post IPO and only recently reached the floatation price again.

Since many people won't be able to pick up Facebook stock, Zynga might be viewed as a good proxy, but there are flaws with this argument for various reasons. 

AG: Let’s not dismiss the original investors and companies like Mail.ru. Yes, this gang has a lot to win or lose as a result of the IPO, but these are also funds that invest in other digital success stories.

If these companies lose a pile of cash then that will certainly impact funding rounds for other companies for years to come.

Twitter and other platforms in the social space have a lot going on this IPO too. If Facebook makes a success of this then there will be hunger for more of the same – or similar; which brings in Twitter.

If the IPO does not go well then the investors will be cautious of anything similar.

David Moth

Published 2 February, 2012 by David Moth @ Econsultancy

David Moth is Editor and Head of Social at Econsultancy. You can follow him on Twitter or connect via Google+ and LinkedIn

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Comments (2)

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Vectorash

Even with these high numbers, 845 million users generating 2.7 billion Likes and comments Facebook is still a risky and expensive investment!

http://www.vectorash.ro/facebook-secrets-ipo/

over 4 years ago

Phillip Stevens

Phillip Stevens, Company Director at Techven LtdSmall Business

"It will likely start to pay a dividend fairly soon and, in the meantime, you get to be a Facebook investor with all the insight that will bring."

Really? Surely the one thing we can be certain of is that Facebook (as is the norm for US listed technology companies) won't be paying a cash dividend any time soon.

over 4 years ago

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