Facebook finally files for IPO
SAN FRANCISCO -- Facebook on Wednesday filed to go public in a bid to raise $5 billion with a mammoth stock offering .
Facebook's IPO has been eagerly anticipated as a defining moment for the latest Web investing boom. The social-networking company, with more than 800 million members, has redefined the way millions of people worldwide interact and share information on the Internet.
A Facebook valuation of roughly $100 billion would rank the company just below McDonald's, which is currently 25th, at $101.5 billion, says Howard Silverblatt at Standard & Poor's.
In the S-1 document filed with the Securities and Exchange Commission Wednesday, the 8-year-old company revealed that it will trade under the ticker symbol "FB" but didn't specify the market in which it will trade.
It also detailed its financials for the first time. In 2011, the company's net income rose 65% to $1 billion. Its revenue rose 88% to $3.7 billion. Facebook is also spending more, with expenses more than doubling to $1.96 billion last year.
Facebook also revealed that it had 845 million monthly active users as of the end of last year, a 39% increase from a year ago.
The daily active users totaled 483 million, up 48%.
Monthly active users who accessed Facebook on mobile devices totaled 425 million, up from 350 million in September.
Facebook gets 2.7 billion likes/comments and 250 million photos a day.
Facebook listed a host of challenges its business faces. The company pointed out that it is heavily dependent on advertising, accounting for 85% of its revenue in 2011. Most of Facebook's advertisers also don't have long-term commitments with the site, meaning Facebook could be hurt if advertisers shift to other venues.
Additionally, Facebook said many of its users access the service using mobile devices, and that growth of these users exceeds the growth rate of overall visitors. But currently, Facebook doesn't present display ads on mobile devices, and Facebook's ability to gather revenue doing so is unproven.
Advertising uncertainty
Once Facebook stock starts trading, the onus is on ramping up revenues to maintain such a lofty valuation. Facebook's fortunes hinge on advertising. Competitor Google raked in $37.9 billion last year, 96% of that from ads.
The good news is Facebook commands a 28% chunk of the U.S. online-display ad impression market, up from 21% a year ago, says market researcher ComScore. Its closest competitor, Yahoo, had 11% of the display-ad market, up slightly from 10.9% in 2010.
The bad news is that Facebook ad sales worldwide are slackening. They grew 104% in 2011 but are expected to climb just 52% to $5.8 billion this year and only 21% to $7 billion next year, according to eMarketer.
"Facebook is not as effective as paid search (on Google, Yahoo and Microsoft)," says Dave Beltramini, director of online strategy for G5, a marketing services firm. "The intent of consumers on Google is more about shopping; on Facebook, people are more social, looking at photos of their friends' kids."
Facebook fares poorly in a key pricing metric used in the industry to measure the value of ad inventory in reaching an audience. Its CPM, or cost per thousand, is 22 cents, less than half the industry average for the Web (50 cents) and minuscule compared with Google ($10 to $12), says Chris Moore, a partner at venture-capital firm Redpoint Ventures.
"Users are looking for something on Google (search)," Moore says. "There is nothing that approximates that on Facebook."
Typically, advertisers use Facebook to build brand engagement, and convert (make sales) through Google, says Melissa Hodgdon, media director at marketing agency Engauge, which works with Facebook and Google.
Improving its CPM is a matter of Facebook "targeting" what users subscribe to and status updates from friends, says John Manoogian , chief technology officer of social-advertising company 140 Proof. "They're not taking advantage of the feed. They're still putting most of their weight into the right" side of a member's profile.
Facebook intends to develop ads that are more integrated into user profiles, such as those that essentially "freeze" a brand's newsfeed post and turn it into an ad that's only visible to someone following that brand, or a friend of a follower, says Rebecca Lieb, an analyst at market researcher Altimeter Group.
Meanwhile, display ads touting less belly fat, whiter teeth and a?ai berry cure-alls will eventually be phased out, Lieb says.
Sales beyond advertising seem overblown for now. Despite the hype about virtual goods — the cow you might buy on Zynga's FarmVille, for instance — the category only produced 12 percent of Facebook's revenue last year, a relative pittance.
But Facebook could benefit greatly from mobile ads as more smartphone users work and shop from iPhones and Android devices, says Raymond Rouf, CEO of social-marketing service GraphScience.
Facebook's IPO Timing
Facebook was forced to file to go public because it ran up against the limits of the 500-shareholder rule. Private companies with more than $10 million in assets are required to file detailed financials with the Securities and Exchange Commission once they exceed 500 stockholders.
The social giant passed those marks last year, making the timing of its IPO a widely anticipated move to meet an April 30, 2012, deadline.
Heated competition in social networking also required Facebook to load up on cash to fend off rivals, say industry experts. "There's always the threat of competition, and they (Facebook) always need to stay one step ahead," says Reena Aggarwal, professor of finance at Georgetown University's McDonough School of Business.
Google's foray into social networking last year with Google+ represents the biggest competitive threat to Facebook. Google CEO Larry Page said in the search juggernaut's fourth-quarter earnings report that the nascent social network has hit more than 90 million users. That's "well over double what I announced just a quarter ago," he said.
Yet, some may still question whether Google+ is a passing fad with a limited audience. It's no small secret in Silicon Valley that Google has struggled to prove its mettle in social media. The company's Orkut social network finds its largest audiences in Brazil and India but has otherwise failed to gain significant traction.
And nobody forgets Google's ill-fated Buzz social network. That one remains one of its worst privacy blunders to date, landing it under 20-year privacy review with the Federal Trade Commission last year, and serves as reminder of Google's awkward social advances.
Still, Google's Page has made it clear that successful social products will be rewarded within the company. And the speed at which Google+ engineers have begun unleashing new features puts Facebook in the unusual position of making reactive moves to match Google+ in areas such as video chats and games last year.
Taking in some cash will certainly help Facebook finance a huge ramp-up in its war with Google, says IDC analyst Karsten Weide.
"I think they're (Facebook) trying to get to market as quickly as they can to cash in as quickly as they can," he says. "The concern is that Google will actually get it (Google+) right."
The cash infusion could be used on major acquisitions or expansions into new technologies for battle as well, says Aggarwal.
"The market is going to expect these very high growth rates," she says. "If expectations are not met, the stock will get beaten."
IPO wave or doldrums
Still, a blowout offering alone can't buoy the IPO market after a lagging 2011.
While investors' interest in IPOs and Internet companies is likely to be reignited with the Facebook deal, don't expect that enthusiasm to open doors for many more companies, says Lee Simmons, industry specialist at Dun & Bradstreet. He sees Facebook as a unique company but contends that while investors will clamor for a piece of it, that won't spark any sort of Internet IPO land grab.
"Facebook certainly is in a class of its own. There will be some firms that can ride its coattails, but for a short period of time," he says. The strongest factor in the number of IPOs won't be Facebook, but rather the health of the economy and the direction of the stock market.
Investors looking for a glimpse of the future need only look back to May, when professional networking site LinkedIn had its IPO. Initially, it paved the way for other Internet IPOs. But ultimately, largely because of the stock market's weakness in the summer, 2011 was a relatively weak year for IPOs. Last year, there were 125 U.S.-based IPOs, down 19% from 2010, says Renaissance Capital.
Though LinkedIn and Groupon both had successful offerings last year, their shares are now well below the first day's trading prices. LinkedIn is more than 24% below its May debut, and Groupon is almost 18% below its first trades in November.
IPOs are "very vulnerable to economic activity," Simmons says. And the economy and the stock market "dictates how the IPO market reacts."
Investors are watching to see how shares of other social-networking companies react to the Facebook IPO. Shares of Zynga, maker of games primarily played on Facebook, have enjoyed a lift since last Friday, when speculation about the Facebook IPO intensified. Shares of Zynga closed at $10.42 Tuesday, up 9.5% from their $9.52 close last Thursday, the day before Facebook IPO speculation kicked into high gear.
The bump in Zynga shares is caused when some less sophisticated investors buy the shares, thinking they've found a way to catch the Facebook frenzy early and in a less obvious way, says Francis Gaskins of IPODesktop.com. "They think Zynga is a cheap way to play Facebook. It's the Facebook effect," he says. "Zynga (stock) might benefit (in the short term) because it's the tail behind the Facebook dog," he says.
But Gaskins thinks the short-term frenzy will be very fleeting as the reality of the business takes control of Zynga's shares. The company relies on a few customers who actually pay for the games, he says. Additionally, the company is reliant on having big hits, which is difficult to do consistently with fickle online gamers, he says.
Internet stocks have already been strong performers leading up to the Facebook IPO. The e-Consumer 25 index of USA TODAY's Internet 50 index notched a record high Tuesday, thanks in part to a 6.4% rally this year. The e-Consumer 25 index contains Internet companies that get most of their revenue from consumers, fell slightly Wednesday. Meanwhile, the USA TODAY Internet 50 Index, containing the largest Internet stocks, hit a record high Wednesday following a 8.6% rise this year.