The Value of Frienship

As most of you know Facebook filed for their IPO last week.  While I have followed the coverage surrounding the social media company I have not made any specific posts.  The problem that most retail investors face with hot IPO issues such as Facebook is the inability to get in at the IPO or opening price.  You can just about bet that the stock will skyrocket higher on it's first day of trading.  Current projections based on the company's filing place valuation at 20 times revenue and 80 times earnings.  That seems a little steep to me although additional analysis needs to be completed.


From The Economist comes a piece The Value of Friendship that delves a little deeper into the Facebook story which covers the good and the bad.

• Last year the company had sales of $3.7 billion, a little below recent estimates, and made a net profit of $1 billion. The network boasts 845m users, which, were Facebook a country, would make it the world’s third most populous, behind China and India. Some of the other statistics associated with it are also mind-boggling. Every day 250m photos are uploaded to the site. One out of every seven minutes spent online is on Facebook, according to comScore, a research firm.
• Facebook’s stunning progress has earned the company estimated valuations of between $75 billion and $100 billion. Private trading in its shares on secondary markets has implied a value of more than $80 billion. That would be more than 20 times last year’s revenues—and more than 80 times last year’s net income. These are eye-wateringly high multiples.
• Facebook could also make more money by creating an advertising network that takes advantage of the already extensive reach of its tentacles across the internet. Millions of websites are integrated with it through various software it has developed, including “social plug-ins” that allow people to share their activities and interests elsewhere on the web (a song they are listening to, say, or a newspaper article they have read) with their Facebook friends. This has made it an important source of traffic to other websites and it could offer to help them sell ads, pocketing a percentage of the money raised. Some analysts think this could bring in as much revenue as ad sales on Facebook’s own site.
• As more people use Facebook from mobile phones, the company will also be able to sell ads that appear on these devices. The difficult bit will be to find formats that are not too intrusive on a small screen. Facebook could well end up using “sponsored stories”, which allow, for instance, a music publisher to pay for a link to its website to be embedded in posts that mention its artists. 
• Even its rivals admit that Facebook has the potential to be one of the most valuable companies on the planet. Much will depend on its management. In 2008 Mr Zuckerberg cleverly poached Sheryl Sandberg from Google to be Facebook’s chief operating officer. The only other “critical person” named in the offer document this week, Ms Sandberg has become almost as well known as the founder. Hanging on to her may be difficult (some people wonder whether she could be lured into politics). Many of Facebook’s employees will soon be enormously rich. The transition from edgy start-up to established giant will not be easy. And there are other risks too.
• There is some evidence that Facebook’s growth may be slowing in some markets. But this is because just about everybody who might join the social network in those countries has already done so, rather than because of any widespread dissatisfaction. That said, there has been some grumbling about Facebook, most recently because of its decision to force people to adopt the Timeline feature rather than allow them to opt into it. Such imperiousness could also damage the firm’s ability to generate money. John Gerzema of Y&R, an advertising agency, notes that its surveys of consumers show that Facebook is perceived as increasingly arrogant. “I’m not sure that an ‘Occupy Facebook’ movement is coming next,” he says, “but there is a cold, steely image emerging that could limit the network’s penetration and usage.”
•  The bigger risk to Facebook is that growing concern over online privacy translates into a wave of legislation around the world that makes it far harder for the company to exploit the mountains of data it is collecting. That would throw a spanner into the works of its money-spinning advertising machine. So far there has been little sign of such a backlash, though governments are paying closer attention to privacy. America is thinking of creating a general consumer-privacy law and the European Union is updating its rules.

• Mr Zuckerberg’s social-ist manifesto also made clear that Facebook would stick to what he calls “the Hacker Way”—a nod to “the HP Way” which encapsulated the ethos of the founders of Hewlett-Packard. Facebook has hitherto been able to focus on fostering an innovative culture that encourages employees to move fast and take risks. New programmers are encouraged to push out code onto its platform in their first week on the job and the company regularly holds all-night “hackathons”. Preserving this spirit will be vital if Facebook is to present its new investors with the graph that they will most want to see: one that shows a steadily rising share price.