Following much anticipation, Facebook filed for an initial public offering (IPO) after U.S. markets closed on Wednesday. Reports have speculated that the social media giants offering pending approval from the Securities and Exchange Commission (SEC) could top rival Google Inc.s 2004 IPO, which holds the record for the largest U.S. Internet IPO, raising $1.9 billion at a valuation of $23 billion. Northeastern University news office asked David Sherman, professor of accounting in the College of Business Administration, to analyze Facebooks IPO prospectus and explain what it reveals.
Facebook's IPO is the first significant look for the public and investors into the social networking giants financial statements. What has it revealed?
Above all, it confirms that Facebook is a very strong, profitable company, with revenues of $3.7 billion in 2011 more than 450 percent of its 2009 revenues and almost double those in 2010. Net income has also grown at a similar pace, reaching $1 billion in 2011. Facebooks financial situation is in sharp contrast with that of Renren, commonly referred to as the Chinese Facebook, whose IPO in 2011 showed a small loss in a recent quarter, or Zipcar, whose recent IPO prospectus reported accumulated losses of $32 million over the past three years.
Facebooks IPO also revealed details of its cost structure and revenue stream. Facebook is one of the remarkable companies in that once its platform was built, it encountered only modest service costs associated with growth in revenues, much like Google, LinkedIn and many software businesses. While much of Facebooks revenues come from advertising, a large part of the non-advertising revenues come from computer gaming revenues from users of Zynga, another 2011 IPO that reported strong revenues and profits.
One interesting component of Facebooks IPO filing was the inclusion of a letter from founder Mark Zuckerberg, detailing his motivation for the company. Zuckerberg noted, we dont build services to make money; we make money to build better services. The entire letter is unusual, though Facebook is proceeding in a traditional route, unlike Google, which auctioned shares for its IPO.
What questions about Facebooks performance still remain?
The companys valuation has not been disclosed, but is speculated to be between $80 billion and $100 billion. The strength of Facebooks business is impressive, but the questionwhether this valuation of 80 to 100 times earnings offers attractive future appreciation and the implications for future growthis one that investors will need to grapple with.
Additionally, Facebooks 800 million members are an incredibly valuable asset that does not appear on its balance sheet. Facebooks financials cannot answer questions such as whether the membership could grow, or whether Facebook could increase the time spent by each user on its site and/or find new services that will support the growth in advertising and other revenues Many managers would consider it a blessing to be challenged to find ways to benefit from an 800-million member customer base, so the question is going to be which paths Facebook will choose to do just that.
Now that Facebook has filed for an IPO, what, if anything, will change?
From this point on, much more of Facebook's activities and financial performance will be a public record updated on at least a quarterly basis. For example, the key question about Facebooks potential for future growth and many other business questions will be readily tracked by following quarterly filings with the SEC, as well as in Facebooks increased communications with security analysts.
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