Wall Street divided over Facebook prospects

Jan 09, 2011 by Veronique Dupont
Wall Street sentiment is mixed over Facebook's financial prospects as the privately held social-networking website faces a possible entry into the market next year.

Wall Street sentiment is mixed over Facebook's financial prospects as the privately held social-networking website faces a possible entry into the market next year.

A memo distributed to potential investors in Facebook shares sold by Wall Street investment bank Goldman Sachs suggested the emerging earned about $500 million last year on sales of nearly $2 billion.

"The document disclosed says $355 million of operating profits for $1.2 billion for the first three quarters" of 2010, said Lou Kerner of Wedbush Securities, a brokerage that owns Facebook shares.

"We know the revenues were ramping (up) significantly. We think the revenue approached $2 billion by the end of the year," Kerner said.

"We were surprised by how profitable they were at this early stage of their growth."

Kerner said that Facebook would grow and benefit from economies of scale, increasing its profit margins.

"Given they are at 30 percent margin now it's probably conservative to think that they can reach 40 percent margin as they scale into the tens of billions of dollars of revenue from the $2 billion revenue they had in 2010."

The analyst projected Facebook would have topping other Internet giants, such as search titan .

The privately held Facebook makes money by selling advertising on its website and by "Facebook credits," a virtual cash subscribers can use to buy games and applications, instead of using credit cards.

Kerner said the company earns hefty 30 percent commissions on that virtual money.

Facebook has been in the spotlight since US media this week revealed Goldman Sachs had invested $450 million in the company, alongside a $50 million investment by Russian firm Digital Sky Technologies.

The deal values Facebook at $50 billion dollars, more than companies with much larger revenue, like Time Warner.

Goldman reportedly closed a $1.5 billion offering of Facebook shares after receiving billions of dollars in orders from its wealthiest investors as well as its own executives.

According to Wedbush's Kerner, the shares have actually been trading privately for quite a while.

"The latest trades have been in the $60 billion range," he said.

"So Goldman is actually getting a discount."

Gregori Volokhine, director of Meeschaert New York, was cautious.

Facebook's profit margin level did not surprise him because "it's a sector where the expenses aren't enormous, it's not a heavy industry."

But, he said, "a value of $50 billion for $500 millions earnings means you're paying 100 times profit, while a publicly traded firm like Google has a price-to-earnings multiple of only 21."

"They (Facebook) must quickly transform $500 million into $3 or $4 billion," he added.

The New York Times reported Thursday that Goldman had offered Facebook shares to its powerful internal investment group, Goldman Sachs Capital Partners, which turned down the chance.

"That doesn't show skepticism, for Facebook is extraordinary, but it is all about the price," Volokhine said.

The fast-growing Facebook website, co-founded and headed by Mark Zuckerberg, has more than 600 million members worldwide and more than 300 shareholders, according to Kerner.

If Facebook surpasses 500 shareholders, it will be legally required to begin providing financial information to the Securities and Exchange Commission.

Speculation increased that will launch an initial public offering of shares in 2012. Zuckerberg has resisted pressure to take his company public.

Explore further: US warns shops to watch for customer data hacking

add to favorites email to friend print save as pdf

Related Stories

Facebook finds powerful 'friend' in Goldman: report

Jan 03, 2011

Social-networking giant Facebook could flex its growing might after reportedly raising 500 million dollars from Goldman Sachs and a Russian firm in a deal valuing the website at 50 billion dollars.

US probe after Goldman investment in Facebook

Jan 05, 2011

A Goldman Sachs investment of nearly half a billion dollars into Facebook has spawned a probe by US regulators eager to safeguard the dividing line between public and private companies, The Wall Street Journal r ...

Probe may push Facebook to early stock offering

Jan 06, 2011

A US probe into Goldman Sachs's massive investment in Facebook could drive the hugely popular social-networking website to go public earlier than it hoped for, analysts said.

SEC rule likely to trigger Facebook IPO in 2012

Jan 07, 2011

(AP) -- With so many investors becoming fans of the company, Facebook will be legally required to begin sharing more information about its finances and strategy by April 2012, according to documents distributed ...

Recommended for you

US warns shops to watch for customer data hacking

2 hours ago

The US Department of Homeland Security on Friday warned businesses to watch for hackers targeting customer data with malicious computer code like that used against retail giant Target.

Fitbit to Schumer: We don't sell personal data

16 hours ago

The maker of a popular line of wearable fitness-tracking devices says it has never sold personal data to advertisers, contrary to concerns raised by U.S. Sen. Charles Schumer.

Should you be worried about paid editors on Wikipedia?

20 hours ago

Whether you trust it or ignore it, Wikipedia is one of the most popular websites in the world and accessed by millions of people every day. So would you trust it any more (or even less) if you knew people ...

Philippines makes arrests in online extortion ring

22 hours ago

Philippine police have arrested eight suspected members of an online syndicate accused of blackmailing more than 1,000 Hong Kong and Singapore residents after luring them into exposing themselves in front of webcam, an official ...

Google to help boost Greece's tourism industry

Aug 21, 2014

Internet giant Google will offer management courses to 3,000 tourism businesses on the island of Crete as part of an initiative to promote the sector in Greece, industry union Sete said on Thursday.

User comments : 1

Adjust slider to filter visible comments by rank

Display comments: newest first

1 / 5 (3) Jan 09, 2011
Me and my friends don't bother with it. They say it's just a snooping ground for pedos and police.