29 February 2012

Forget the Year of the Dragon – 2012 is the Year of the Facebook

OMG. Social networking colossus Facebook is finally hitting the public markets as its long-awaited and much-hyped initial public offering (IPO) finally becomes a reality.

And with a suitably grand valuation – a cool USD 100 billion to be precise – this offering knocks the spots off the company’s near rivals who have also recently launched into the markets.

Facebook’s IPO aims to raise USD 5,000 million – compared to the USD 1,700 million raised by Google in 2004, which at the time set a record.

One of the main criticisms levelled at Facebook as a corporation was its apparent secrecy – little was known of its financial position, although it was fair to assume the company was in a pretty healthy state money-wise.  A clue to this was the value of funding being poured into the business over several rounds from investors including Accel Partners, Meritech Capital and Greylock Partners, and culminating in a USD 1,500 million round early last year from DST and Goldman Sachs, which valued the social network at around USD 5,000 million.

Even back in 2006, when Facebook was still in its infancy, Microsoft could see the potential of the business and started making overtures to gauge interest from the company about a possible sale to the software giant. Press speculation at the time pegged the social network’s value at around USD 15,000 million.

Indeed, even the way in which the social network actually made money was something of a mystery – although it was clear that advertising played a key role.  However, this veil of secrecy finally had to be lifted when the company filed its registration documents for the offering with the Securities and Exchange Commission, and the figures have been laid bare for all to see.

And what a set of figures they are. Revenue for 2011 stood at USD 3,710 million, up a massive 88 per cent on the USD 1,970 million recorded in 2010, and leaping 12 and a half times from the USD 157 million achieved by the network back in 2007.  The business also managed to chalk up a tidy profit of USD 1,000 million last year, proving that the good times are definitely rolling for the Menlo Park-based group.  But the impressive numbers don’t stop there. Facebook also boasts 845 million monthly active users (MAU) as of 31st December 2011, up 39 per cent on the previous year, and an average of 483 million daily active users (DAU) in December 2011, an increase of 48 per cent on the 327 million recorded in December 2010.

In comparison, peer companies LinkedIn and Zynga are still lagging behind, as the professional social network had net income of USD 7 million for the fourth quarter of 2011, while the online games developer declared revenue of USD 311 million for Q4 2011, but made a net loss of USD 435 million. Another online phenomenon, Groupon, released its fourth quarter results and revealed it had failed to make a profit despite an almost three-fold increase in revenue.

The filing also showed just how dependent on advertising Facebook is.   The bulk of the company’s revenue is generated from its self-serve advertising platform, a tool that lets users create their own ad campaign by accessing the ‘following’ page, enabling users to be targeted based on their personal tastes, likes and dislikes.
In an unusual step, the network’s founder and CEO Mark Zuckerberg issued a personal letter with the IPO filing in which he outlined his vision for the company as a tool to bring people together and connect with each other in an ever-more technological age.

The social network’s market debut certainly sets it apart from its online peers LinkedIn, Groupon and Zynga. In May last year, professional network LinkedIn raised USD 353 million in its offering, valuing it at around USD 3,000 million, and marked the first of a wave of tech companies eager to go public.

Group discount buying portal Groupon then upped the stakes when it increased its IPO from USD 500 million to USD 700 million, valuing the business at close to USD 13,000 million. The last of the crop to take the market plunge was Zynga, raising USD 1,000 million in its share sale, but its USD 7,000 million valuation was significantly less than the USD 20,000 million that had been touted earlier in the year.

The online games start-up also made a disappointing stock market debut, and subsequent trading in LinkedIn and Groupon shares have been similarly below their peak prices, suggesting that the enthusiasm among investors for shares in this new crop of technology-focused companies may be starting to wane.

It will be interesting to see whether the momentum of Facebook’s campaign to go public will be maintained once the company has listed.  But even if it does eventually run out of steam, there is no doubt that the social network will go down as one of the biggest – and most significant – IPOs of all time.

© Zephus Ltd