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Facebook flotation: what's to like?
Few can fail to be impressed by the social media firm's numbers, but can it justify a $100 billion (£62 billion) valuation in its flotation today?
‘As recent IPOs [initial public offerings] of Groupon and Zynga have shown, executing on growth plans can be more costly and time consuming than many believe and therefore investors may need to show some patience before seeking returns.’
Polar Capital Technology trust manager Ben Rogoff maintains it is exceptionally well positioned with its large and ‘sticky’ user base, creating a high barrier to entry. Although revenue growth slowed to 45% year-on-year in the first quarter down from 88% from the whole of 2011, he says this was at least partly explained by the rise of mobile active monthly users, which soared by 69% in the first three months of the year.
‘On balance, we believe mobile access to Facebook will be successfully monetised,’ Rogoff says. ‘Social media stocks are the only area of technology where valuations appear to be stretched, although in a limited number of cases the high valuations may well prove to be justified. As much as Google emerged as a winner over the last decade, Facebook and LinkedIn currently appear to be the two most promising candidates in our view.’
He argues that Facebook’s revenue of £3.8 billion in 2011 compared to $29 billion for Google, underlines the opportunity.
‘Facebook’s profitability reflects the lack of credible competition with an operating margin of 47% last year, although it did slip to 36% in the first quarter of 2012 as the company continues to invest for future growth,’ he says.
‘Another interesting way to look at the growth potential is that Facebook currently captures only $4.34 of advertising revenue per user, per year.’
‘The most significant incremental opportunity here lies in better monetisation of their social mapping, enabling advertisers to precisely target small groups of users (which the company claims it can do with 90% accuracy).’
Whether it can achieve this without losing customers or the ‘cool’ factor remains to be seen, but for many at the estimated float price, the gamble is too large.
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