Facebook prices its IPO at $38 ahead of Friday's trading

SAN FRANCISCO -- Facebook is about to burst out of the IPO gate Friday, with a blistering initial public offering that is expected to raise billions — not to mention the eyebrows of some investors on Wall Street.

Priced at $38 a share on Thursday, the 8-year-old social-networking company, fronted by hoodie-wearing CEO Mark Zuckerberg, could raise $16 billion in funding, not including an overallotment option. It could end its first day of trading worth up to $104 billion. That would make it worth more than Disney, Ford and Kraft Foods. It would be the second-largest U.S.-listed IPO behind only Visa. Facebook's market debut, the biggest tech company IPO ever, should create 1,000 millionaires overnight.

The mega-offering signals a seminal event in the Internet's maturation as a fundamental cog in the world economy, says Dave Morin, CEO of Path, a social network of 3 million and a former Facebook executive. "It sets the tone for long-term, product-driven Internet companies," he says.

"This is an IPO with enormous impact," says Charlene Li, founder of market researcher Altimeter Group. "No one will touch Facebook in its market for the next few years."

Froth over Facebook's first day of trading on Nasdaq has become a national obsession, sparking debate over Zuckerberg's hoodie, the scope of the social network's influence on American culture and the Internet, and what it all means to a sputtering U.S. economy. Facebook's IPO dwarfs that of Google, which raised $1.7 billion in 2004, but the comparison ends there. Google's revenue then was $3.2 billion and soaring while Facebook's already show signs of cooling off.

Scrutiny will be intense

Going public means Facebook sacrifices some financial flexibility and will raise questions about its financial bona fides, says Nancy Miller, author of The Facebook IPO Primer. It faces "intense scrutiny from shareholders," Miller says.

Concern about that issue was underscored in a letter Zuckerberg wrote in the company's registration statement, in which he vowed to continue to operate Facebook as if it were a private company.

"Simply put: We don't build services to make money; we make money to build better services," wrote Zuckerberg, who controls 55.8% of company stock voting rights.

Not that Zuckerberg is indifferent to the wants and needs of investors. Despite reports that he would nix participating in the road show to drum up support for the IPO, Zuckerberg participated.

One of the topics undoubtedly broached is how Facebook intends to ramp up revenue to meet the heightened expectations of investors and analysts in the months — and years — to come. Speculation has centered on Facebook introducing search functions and an ad network for third-party sites.

It may have no choice but to speed up an already-aggressive product timetable to diversify revenue and satisfy shareholders in the coming months. That's because its biggest source, ads, has dipped. Last month, it reported first-quarter ad revenue was $872 million, down 7.5% from the previous quarter. It blamed "seasonal trends" and shifting user growth for the decline.

Longer-term concerns?

Facebook is under mounting pressure from Wall Street to unearth new revenue to reduce its reliance on advertising, which accounted for 85% of its revenue last year.

In fact, Facebook may have lost some of its fizz in the days leading up to the IPO because of slackening advertising revenue growth projections. The company is expected to haul in $5.06 billion in total revenue this year, up 61% from 2011. But its ad business is expected to grow just 33%, to $6.72 billion, in 2013, eMarketer says.

What's more, the Google Display Network is trouncing Facebook in key advertising areas. Google banner ads, for example, are more than 10 times more likely to be clicked on than Facebook ads, according to research from WordStream, a maker of search-engine marketing software and services.

That was underscored Tuesday, when General Motors pulled its paid advertising from Facebook — raising questions about Facebook's ability to service blue-chip clients.

While Facebook's boffo IPO is sure to tickle some investors, a faction of Wall Street "traditionalists" are sure to raise their eyebrows at the company's perceived market value.

While Apple closed Thursday at a seemingly steep $530 a share, for a market capitalization of $494 billion, the stock remains relatively cheap at a price-to-earnings ratio of 13.3. Google also is a high-priced stock, at $623 a share and a market cap of $160.7 billion, and its P-E is a little richer at nearly 24. But, like Apple, its annual profit is in the billions, and it is arguably one of the few companies that can support its valuation and growth expectations regardless of market conditions.

"For several years, Yahoo suffered because it underperformed when compared to Google," social-media analyst Greg Sterling says. "The stock got punished. There is some of that potential with Facebook (when compared with Google, Apple and others)."

But in the breathless buildup to a blockbuster IPO steeped in hype, there are concerns:

•The mobile-advertising puzzle. Like everyone else, Facebook is trying to figure out the Rubik's Cube that is mobile advertising. The market holds vast promise, but few have cashed in. Under a best-case scenario, Facebook would generate up to $2.54 billion in revenue from new mobile traffic this year, up 68% from 2011, according to market researcher Chitika.

Facebook is determined to make a go in mobile, even though it has yet to make much money there. It snapped up photo-sharing app Instagram for $1 billion, redesigned its three mobile apps, launched several industry initiatives and offered some details on its efforts to move its desktop platform onto smartphones and tablets.

The push paid off with 160 million visitors to mobile apps on Facebook last month, up from 60 million in late February. Mobile users accounted for 1.1 billion visits to Facebook mobile apps, compared with 320 million in late February, according to a Facebook company blog post. Facebook says seven of the top 10 grossing iOS apps and six of the top 10 Android apps have Facebook integration.

Mobile is growing fast on Facebook, but if Facebook stuffs ads on mobile carelessly, it "risks alienating users," analyst Sterling says.

•The social-commerce hole. Investors are sinking money into start-ups offering subscriptions, curation and celebrity endorsements in a bid to capture a slice of Facebook's market.

Yet major brands such as Gap, Nordstrom, GameStop, J.C. Penney and Old Navy shut their virtual storefronts on Facebook when they didn't spur consumer sales.

Still, there are hundreds of thousands of smaller sellers betting Facebook can develop into an e-commerce powerhouse to rival Amazon.com and eBay. Many are pushing out shopping apps, hosting online garage sales and testing new business models on Facebook.

E-commerce platform vendor Payvment is signing 1,500 small and midsize sellers a week, and is up to 155,000.

"One-to-one marketing doesn't work on Facebook, but it is a great influencer in a one-to-one-to-many manner, when someone 'Likes' a product," says Brian Solis at market researcher Altimeter Group.

•Slackening social-gaming revenue. After two years of soaring growth, the number of gamers on Facebook languished in 2011, says market researcher IHS. At the end of 2010, about half of Facebook's monthly active users played games. By early 2012, that number had plunged to one in four.

But there is strength in those diminishing numbers. Sales of virtual goods in mobile games in the U.S. are expected to vault to $500 million this year compared with $350 million in 2011, says researcher WebMediaBrands.

Life, post-IPO

Life in the post-IPO world can be humbling. Groupon's recent stock woes are a cautionary tale of what can happen to a once-hot Internet commodity that loses its way. Its stock price plummeted shortly after it started trading.

"Going public is one of the worst things that a tech company can do," analyst Sterling says. An IPO "exposes (Facebook) to scrutiny that they did not have."

Investors and analysts will ratchet pressure on Facebook to "start chasing revenue (they) might not otherwise to show near-term growth," Sterling says. Ultimately, he says, Facebook might dive into search, mobile or an ad network for third-party sites.

Privacy as a commodity

There is also the inevitable pressure to monetize data for advertising purposes, which could raise privacy concerns.

Such is the calculus of lingering privacy issues for Facebook, which must be careful not to share too much of its members' data with eager marketers and advertisers.

"Facebook has a database filled with information about 900 million users," says Allie Kline, chief marketing officer at 33Across, a social-marketing analytics company. "That's a lot of power, but it's no different than what Google, Yahoo and Microsoft face weighing user data vs. privacy."

It is a challenge most companies would pine for, as a prominent venture capitalist notes.

"The Facebook arguments (against) are lunacy," says Bill Gurley, general partner at VC firm Benchmark Capital. "Any challenge they face is offset by little chance of anyone knocking them off. Their competitive advantage is that big.

"They have been held up as poster child for so long, that some feel the need to dwell on the negative," Gurley says.