Thursday, 2 February 2012

Facebook files its prospectus: stay out!

Facebook`s initial public offering is imminent, as today it filed the prospectus. Just like all new age, Internet companies "that cannot be measured using traditional metrics", the focus is on the 845 million active users, 2.7 billion likes and comments per day, 250 million photos uploaded per day and 100 billion friendships. That is jolly and all, but how much is an uploaded photo, a like or a friendship worth? Wile the advertising business model seems less effective than Google`s Adsense model, there is some growth potential in the web developer (mainly apps) business model, whereby Facebook is charging 30% of all revenues. Integrating social gaming into its platform is an extremely well though out move.

Is Facebook over-hyped ?

While enjoying Facebook as a website is a matter of personal taste, purchasing into the IPO at the $100 billion market capitalisation  may be a bit far-fetched. It is paying 27 times its 2011 earnings which increased 87% in 2011 and 154% in 2010. Arguably it reached a level at which growth percentages will gradually decline from the 3 digit mark to lower 2 digits. It is got 3.9 billion in cash and cash equivalents and working capital of 3.7 billion.

Risk factors

As mentioned in the prospect potential risk factors are: 

• If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results, and business may be significantly harmed;

• We generate a substantial majority of our revenue from advertising. The loss of advertisers, or reduction in spending by advertisers with Facebook, could seriously harm our business;

• Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results;

• Facebook user growth and engagement on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that we do not control;

• We may not be successful in our efforts to grow and further monetize the Facebook Platform;

• Our business is highly competitive, and competition presents an ongoing threat to the success of our business;

• Improper access to or disclosure of our users’ information could harm our reputation and adversely affect our business;

• Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could harm our business;

• Our CEO has control over key decision making as a result of his control of a majority of our voting stock;

• The loss of Mark Zuckerberg, Sheryl K. Sandberg, or other key personnel could harm our business;

• We anticipate that we will expend substantial funds in connection with tax withholding and remittance obligations related to the initial settlement of our restricted stock units (RSUs) approximately six months following our initial public offering;

• The market price of our Class A common stock may be volatile or may decline, and you may not be able to resell your shares at or above the initial public offering price; and

• Substantial blocks of our total outstanding shares may be sold into the market as “lock-up” periods end, as further described in “Shares Eligible for Future Sale.” If there are substantial sales of shares of our common stock, the price of our Class A common stock could decline.

Other recent tech IPOs

It is also worthwhile to consider the faith of other recent technology companies IPOs. As reported in a Zerohedge article, the sheep who bought the tech IPO (out of the largest eight) has experienced an average loss of 54% to date. Moreover, out of these 8 IPOs (Groupon, Zynga, Linkedin, Pandora, Youku, E-commerce China Dangdang, Home away and Friend Finder Networks) only Zynge is in blue ink (+11%), after a recent rally of 15%. From Zerohedge:

Will this time be different ? It never is.

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