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Technology / Data

Is the Facebook IPO actually worth the investment?

Facebook Headquarters
Photo credit: Kevin Krejci

Facebook’s IPO is expected to raise $16bn, outdoing Google’s offering which raised $1.67bn back in 2004 and making it the largest technology IPO to date.

Facebook’s $38 share price, with its 421 million shares, give the company a current value of over $100bn.

Many analysts are shaking their heads at Facebook’s high share price, deeming it presumptuous and on the expensive side. The valuation price is based on the assumption that the company will see high revenue growth over the next five years.

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While Facebook is strong in its number of social media users, it is facing fierce competition from Google’s social media network, Google+.

Facebook is also immature when it comes to advertising, which is problematic since it’s where the majority of its revenue come from. Companies are still questioning if buying advertising on Facebook is a smart choice and have started to pull their advertising on Facebook, choosing instead to run free fan pages to maintain a social presence. Just recently, General Motors pulled their $10m advertising budget from the social network.

"Facebook is currently finding it difficult to compete with Google’s more mature and more developed advertising platform," says Phil Harpur, senior research manager for ICT, Frost & Sullivan Australia. "To gain full industry confidence, it will be critical that Facebook spends a lot of time and resources developing its advertising model further."

Facebook will need to focus on providing more features that can help measure the impact of social marketing for business goals and advertisers’ targeting capabilities.

Yet, Facebook’s strong global standing, with close to one billion users, gives the company a large opportunity for huge growth over the long term.

"On the flip-side, Facebook’s immature online advertising model, combined with their massive global reach, gives them huge potential to grow for very high revenue growth over the longer term and compete head on with Google in terms of advertising revenues," said Harpur. "Google on the other hand while still displaying solid growth in online advertising revenues, no longer has the potential for such rapid growth due to its more mature advertising platform."

Advertising is currently the strongest way that Facebook can justify its IPO valuation and maintain high revenue growth. Facebook can potentially increase its ad revenues by coaxing advertising away from other platforms.

"Facebook will need to generate annual revenue of $30-$40bn in order to justify the likely IPO valuation of the business," says Victor Basta, managing director for Magister Advisors. "This is a ten-fold increase over the revenues that it currently generates. The question is "where from?"

"Advertising is fundamental currently, and Facebook will have to channel ad dollars away from other players and onto its platform to achieve this. Enhanced services to companies would also be a logical step," he added.

Whether Facebook’s IPO standing will remain strong has yet to be seen. The daily deal website, Groupon, is down 35% from its IPO back in November and Zynga is down 18% from its IPO in December last year.

More than half of Facebook’s users access the site predominantly through mobile, so embracing mobile is crucial to Facebook’s growth. Yet, mobile advertising is still in its early stage so Facebook is likely to experience difficulty in this area.

The success of Facebook will rely heavily upon how the company performs in advertising and innovative ideas the company can come up with to obtain profits.

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This article is from the CBROnline archive: some formatting and images may not be present.