Outside Facebook’s vast new headquarters in Silicon Valley is a huge sign with an image of a hand on it giving a thumbs-up sign. A tiny digital version of the same hand sits on millions of websites and invites Facebook’s 900 million or so users to click on it to share content they have found with their pals. Now Facebook is hoping to get another big thumbs-up when it stages its eagerly awaited initial public offering (IPO) of 12% of its equity on America’s NASDAQ stockmarket on May 18th. Assuming all goes according to plan, the flotation will be the largest yet undertaken by an internet company.
On a roadshow across America to promote the listing this week, Mark Zuckerberg, Facebook’s 27-year-old boss, and other executives were treated like rock stars. Long queues snaked out of hotels where they were holding meetings, as investors lined up to hang on their every word. Hordes of photographers rushed to take pictures of Mr Zuckerberg, in his trademark hoodie, as he and his colleagues were whisked off to waiting limousines.
This frenzy is further proof, if any were needed, that Facebook has become a global internet idol. Facebulls reckon the flotation, which could raise almost $12 billion (with about half going to shareholders selling up), will help transform the social network into a web powerhouse in the same way that Google used the riches from its 2004 IPO to spread its tentacles across the web. And they confidently predict that Facebook’s shares will start trading well above the range of $28 to $35 that the firm has set for them — a range that would value Facebook at $77 billion to $96 billion.
Some financiers think it could command an even bigger price. If Facebook’s valuation were to hit $100 billion, it would put the company roughly on a par with, say, Amazon and give it a market capitalization greater than those of Dell and Hewlett-Packard combined. One analyst even dismissed Facebook’s suggested pricing as “pretty silly,” pointing out that its shares were changing hands at $44 on at least one secondary market before trading in them was suspended ahead of the IPO.
However, there are good reasons for caution. Several high-profile internet firms that went public last year, including Zynga, a social-gaming company, and Groupon, a coupon-peddler, have seen their shares fall below their IPO prices and stay there. Even seasoned investors find it hard to resist a lemming-like rush to grab stakes in high-profile web firms. “When it comes to consumer-internet companies, enthusiasm often overwhelms pragmatism on offering day,” notes Lise Buyer of Class V Group, an IPO advisory firm.
Facebook is admittedly in a different league to the likes of Zynga and Groupon. Its size gives it access to mountains of data and to economies of scale that others cannot match. It can also tap into a wide range of moneymaking opportunities. Last year the company made most of its $3.7 billion of revenue from online display advertising. But it also takes a slice of the sales of digital tractors, swords and other virtual goods in games run by Zynga and others that use Facebook’s platform to reach customers. This business generated $557 million for the social network last year.
Such sums of money are impressive given that Facebook was only launched in the same year that Google went public. But the network’s rise also raises several important questions that investors would do well to ponder. The first of these is whether Facebook can become a part of the fabric of a more social web, rather than simply a destination on it. Within five years, Mr Zuckerberg sees all kinds of applications being linked to Facebook in one way or another. But to achieve this goal, the network must convince users to stick with it. The brief history of social networking is littered with examples of former high-flyers, such as Friendster and MySpace, whose fortunes faded after users dumped them in droves when they were no longer considered cool — even though this meant abandoning the content they had built up there.
Alert to this risk, Facebook has been rolling out new features such as Timeline, which encourages users to load their life histories onto the social network, to bind them in more tightly. So far, this approach appears to be working. Facebook trumpets that it had 901m average monthly users in the first quarter of 2012. And 526 million, or 58% of them, used the service daily in March, up from 55% last year. This matters not least because frequent users are the most likely to click on ads and to splash out on virtual crops and other gaming paraphernalia.