When you are big and you go public, strict scrutiny will naturally follow you around. And social networking giant Facebook will vouch for that. Last Wednesday, the company announced its decision to become a publicly traded company, filing to raise $5 billion through an initial public offering (IPO). Analysts have been particularly skeptical of Facebooks IPO, especially since the extreme hype and emotional appeal of the stock, particularly for retail investors, has given it a sort of a sugarcoated appeal. A wealth management senior executive was quoted by Reuters as warning hat hype building up ahead of Facebooks IPO could mean "dangerous waters for the retail investor". Having been brought under the radar of public scrutiny, the companys revealed revenues of about $3.7 billion last year were shy of what analysts had expected. With a stock offering eyeing a hefty valuation between $75-100 billion, which means a multiple of about 27 times its revenues and 100 times its earnings, investors and analysts have become wary of putting their money in the much-anticipated IPO. Even though a revenue growth rate of 88 percent in 2011 seems impressive, wealth managers and analysts believe the company should be valued between $50-65 billion at best. The social networking websites primary stream of revenues is generated through advertisements, which, many believe, still have tremendous room for improvement and growth. 60 percent of the advertisement revenue is generated via ads crammed on the right hand columns, which advertisers are beginning to doubt the utility of. Besides, with the option of being able to create a free Facebook page that serves as a pretty good branding tool, one wonders if companies will be willing to pay to get their ads posted when it can be done for free. Further, the company has not looked into mobile advertising yet, even though nearly half of its close to 1 billion users access their Facebook accounts via mobile phones. Compared to Google - generating $38 billion in revenues last year - Facebooks revenue stream appears to leave a lot to be desired. And Googles shares are being traded at a 5 times multiple to revenues against the projected 27 times for Facebook. And the massive growth in the number of users that became the central point of Facebooks success story is also waning. The hypergrowth in membership is slowing down, with the Western world believed to have already become considerably saturated. Which means that the social network has to invest in alternate sources of revenues, such as its games. The company is generating about 15 percent of its revenues by levying taxes on the games played on Facebook, with gaming company ynga alone generating 12 percent of the revenues. Facebook can also use the massive amount of demographic data it possesses to devise apt advertising strategies, but that might not go down well with users wholl be concerned about their online privacy. Despite these concerns, the company has a lot of potential. "Facebook still has profit margins that would be the envy of most young businesses...Its operating profit margin last year, of 47 per cent, was still roughly equivalent to the 50 per cent that Google reported in 2005, when its net revenues were at a similar level," said an article in the Financial Times last week. And with the innovative ways with which the network has managed to keep users hooked, one would want to give the company the benefit of doubt. Who knows, with the $5 billion generated through the IPO, Facebook may come with another Farmville or a stream of the most captivating ads ever that will cement investors and users faith in the network even more.
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