Facebook Inc. has for the first time revealed the massive profits to be made from the seemingly simple task of connecting people – but the question is how much investors will be willing to pay for a piece of those earnings.
In a registration with the U.S. Securities and Exchange Commission for an initial $5-billion (U.S.) offering of shares, Facebook revealed that more than one-quarter of the money it takes in as revenue goes straight to the bottom line. The company said revenue surged 88 per cent in 2011 to $3.7-billion and profit jumped 65 per cent to $1-billion.
In the process of connecting 11 per cent of the globe through its electronic platform, the eight-year-old company has already filled its coffers with $3.9-billion in cash and cash equivalents. Its base of active users swelled 39 per cent last year, to 845 million individuals.
In its filing documents, Facebook did not say how many shares it would offer the public, or in what price range. Until those details are provided in the coming weeks, it won't be possible to put an intended price tag on the world's biggest social networking company. Reports last week said Facebook is weighing a valuation of between $75-billion and $100-billion.
An exclusive group of investors has already driven the implied valuation of the Palo Alto, Calif.-based company to almost $90-billion during more than two years of trading on private exchanges. Employees and early investors began offering shares on SharesPost as early as August, 2009, when they traded at $2.40 each, giving the company an implied valuation at the time of $5.6-billion.
As Facebook membership grew, so did the share price – to $10 in April, 2010, and $20 a year later. The stock struck a high of $66 last January, implying Facebook was worth $155-billion. On Wednesday, the shares traded at $38.
These figures give Facebook a sky-high valuation that will require robust growth to maintain investors' expectations.
At $100-billion, the company would be valued at about 100 times earnings and 27 times last year's sales, which would be more than double the valuation bestowed on rival Google Inc. when it went public in 2004.
The company that says it's built on the wisdom of friends will now be judged by the wisdom of markets.
Facebook says its focus is improving the products it can offer advertisers. These advertising tools will attempt to make ads more social, relevant and integrated for Facebook users.
The company also opened the door to the possibility of creating new revenue streams from integrated apps for the Facebook platform, similar to the way Apple Inc. has built a new business out of apps for its iPhone and iPad products.
It's possible that in the coming weeks Facebook could increase the amount of money it wants to raise in this offering, although in its filing the company stated, "We do not currently have any specific uses of the net proceeds planned."
The stock is expected to begin trading in May under the ticker symbol FB.
Mr. Zuckerberg was reportedly reluctant to proceed with an initial public offering, but his hand was forced by U.S. regulations that require a company to release financial data once it acquires 500 shareholders.
In a recent television interview, Mr. Zuckerberg said the IPO would enable the company to attract more talented engineers by offering them options, and it would allow early investors an orderly way to liquidate some of their positions.
Mr. Zuckerberg, who held 28 per cent of the company before the public offering, will retain control of the company through a dual-class share, although his new ownership stake was not disclosed.
Among the challenges he will face is meeting U.S. and foreign laws regarding privacy. Mr. Zuckerberg has already made several public apologies in response to complaints about the way the company handles privacy. In November, Facebook agreed to a settlement with the U.S. Federal Trade Commission following an investigation into its practices.