Facebook goes public

5/17/2012

That the social media site Facebook is popular is without question. More than half of the American population use the site to update their friends about their lives. Worldwide, there are 900 million monthly users.

As the company prepares to become a publicly traded company on the NASDAQ stock exchange this Friday, the question is whether that popularity will be enough to create a financially sound company. Given the interest in the initial public offering of stock, a lot of people are betting Facebook will be a blue-chip investment. More than 400 million shares of the company will be sold by the closing of the IPO later today.

Time will tell if the exuberance is justified. The IPO is the largest Internet one by far, exceeding Google by more than 10 times. It will be the third largest U.S. IPO in history. If shares sell at the high end of the $34 to $38 projected range, the IPO would raise $16 billion and value Facebook overall at more than $100 billion. The company started by Mark Zuckerberg in his college dorm room eight years ago will be worth more than Disney, Ford and Kraft Foods overnight.

There will be an enormous amount of pressure to meet market expectations. If any company could pull it off, it would be Facebook. It is one of the few Internet companies in recent memory that actually had made even one dollar profit before going public. Last year, Facebook posted $1 billion profit on $3.7 billion revenue.

That's not a bad margin. But is it good enough to be valued the same as either McDonald's or Amazon?

We don't think so. Usually, big public companies are valued at 15 times their annual profit. Facebook is being valued at 100 times its annual profit, and there is no track record other than one year of that size profit.

So investors are basing everything on the future. In order to justify the $100 billion value, Zuckerberg and Co. need to generate $6.7 billion profit. Facebook will need more users, more revenue-per-user and a skyrocketing uptake of paid advertising placements by other companies.

The potential barriers to such success are numerous. Facebook is banned in a few authoritarian countries including China, the most populous. A recent Associated Press-CNBC poll reveals half of the American population think Facebook is a passing fad. Advertisers regularly complain of the ineffectiveness of the platform. In fact, GM announced this week it was pulling all of its paid spots from the site. A solid 57 percent of users say they never click on ads, with another 25 percent reporting the rarely do.

The increasing popularity of accessing Facebook via a mobile phone is yet another threat. The small screen size severely limits the number of ad positions available.

And then there is the whole privacy issue. Facebook has gotten into trouble with users and government alike regarding how it utilizes the data it collects. That will get worse in the future. With increased pressure to produce profit, the public's personal data is at risk. Facebook, after all, doesn't create anything. Its product is the personal information posted by users.

Still, a lot of people are going to get rich from Facebook's IPO. Zuckerberg stands to gain $1.15 billion from the shares he's selling. And he will remain the company's single largest shareholder, with well over 55 percent of its voting stock.

Co-founder Eduardo Saverin expects to make so much money he's giving up his U.S. citizenship. Since 2009, the native of Brazil has lived in Singapore, which doesn't have a capital gains tax.

All told, Facebook employees and early investors will rake in more than $9 billion by the end of today. The company itself will generate close to $7 billion.

For the rest of the population, the only way Facebook will add to your wealth will be if you purchase stocks starting Friday -- and Facebook manages to beat Wall Street expectations. If it can't, you can always fall back on the credits you earned playing Farmville.

Editorial by Patrick Lowry

plowry@dailynews.net

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