Is the smart money on Facebook?


This Friday, Facebook plans to go public. This initial public offering could push the company’s market value over $100 billion, but is the smart money on Facebook?

With the growth of Facebook in recent years and its amazing staying power as the social network of choice for over 500-million users, many people would think that buying into the company would be a no brainer and the value can only go up. However, there are some considerations to take into account.

Facebook’s income stream is through advertising, much like Google. Google obviously exploded in value and people clearly don’t want to miss another similar opportunity, but Facebook is only seeing revenue of $1 billion compared to Google’s $12.3 billion. When you translate this to share prices, the market will be paying six times as much for every dollar earned by Facebook than by Google.

The company’s earnings are also not as impressive when looked at from a percentage point of view. While looked at year on year, the earnings grew, when looked at quarter on quarter, the earnings declined 12%. Meanwhile, Facebook’s average revenue per user grew by 6% in the past year which is not the large number that some shareholders would be hoping for.

While Facebook does have the advantage of being able to offer very targeted advertising thanks to the private information supplied by users, the jury is out on whether their advertising is actually effective. Some companies will swear by it for the ability to focus on small target groups, but others, like General Motors, are pulling out of their Facebook advertising all together.

At the end of the day, pressure will be on Facebook from shareholders to find new earning streams, especially as more and more users are moving toward the mobile platform which they have not yet been able to capitalise on.

Another concern for potential shareholders is the question over Facebook’s ethics. The Social Network, the movie based on founder Mark Zuckerberg and the company, made some people very uneasy over just how ethical the company can be when Zuckerberg himself is considered suspect. These days it’s becoming clearer than ever that people don’t want to be involved in the unethical.

As the largest social network around today with no serious competition, Facebook seems like a sure winner but as it turns out, investors will certainly have their work cut out for them as they consider buying into Facebook.