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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.’

'Big opportunity'

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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28 comments so far. Why not have your say?

Jayzee Cole

May 18, 2012 at 13:12

A many of the users of facebook are time rich - resource poor.

They are happy to waste hours of their time but will they be prepared to spend their sweet/beer money!

Eventually, those that grow up, may not want to be constantly reminded of their banal and stupid utterings born of childish ignorance.

I think facebook will define a generation but something new and better will come along to replace it.

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joe stalin

May 18, 2012 at 13:25

No! I absolutely agree with Jayzee somethin better will undoubtedly come along. It has been over hyped by the media and lead book runners. The smart money is using the flotation to get out.

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Chris Clark

May 18, 2012 at 13:25

The articles have all been written, the comments all made, and we are all almost there.

In Forbes and similar it was hyped. In most other articles written for financial investor reading facebook was panned, and certainly was panned in 9 out of 10 comments. I wonder how all this facebook coverage will look 5 years from now.

Will my decision to stay away be the daftest thing I ever did, or a moment of sublime wisdom...

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mikeran

May 18, 2012 at 13:49

Agree JS Financial world set up and hyped . Yes the smart money will be rubbing their hands. I will take a small guess that this may even end up lower on the very day of launch.

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Jonathan

May 18, 2012 at 13:52

$100 billion, I remember the excitement at lastminute.com. This was valued at over £500 million when it floated. With facebook's current profits it doesn't look like they are with $100 billion. With nearly 1 billion members (many of whom may never use the site) this puts the share price at a value of over $100 per user.

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Michael Peters Fenwicks

May 18, 2012 at 14:17

What is there to like about the facebook stock? Doesn't make anything nor revenue indication as away of evaluating value of the company.

I am buying it to make some money but will never be a long term candidate on my portfolio - short and sweet.

Simple as that.

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S G

May 18, 2012 at 14:21

I use facebook regularly, mainly for emailing and organising things with friends from BBQ's to Camping Trips, From Fishing to Diving, From Walks to Climbing.

On all these trips at least one person has a camera to capture our moments of enjoyment and sometimes frustration. Nothing new is going to come along, as the majority of users have too much invested, eg photo, and videos. It would take me ages to download by 1500+ photos and make a note of the descriptions and locations then hours to upload to a new site. If i did decide to take that route, I would have to hope the majority of my friends did the same thing. Facebook is code and can easily be updated and changed. If something new comes along, Facebook could take the idea, improve on it, before it even gets off the ground. Look at google plus, majority of users signed up just to see what it was with no real intention of moving to it.

Facebook is also not just for one generation, my parents are on it, they live in a different country and through facebook they they stay in contact and can see what we are doing (I mean that in an involved way not a checking up on). I am also setting up a page for my new born. (No personal details on there) he will have a full record of his life, and be able to see and be remind of all the things he has done. I wish I had more pictures and video of my child hood. People who are not on facebook, and reject to become part of it, then put it down, dont know what they are talking about. They complain of information being used, simple answer dont put it on facebook. No one is forcing you to put your details up there.

With regard to the shares, Facebook is sitting the most complex marketing database in the world. This is where I think they are going to make their money. Selling results (not data) to marketing firms and companies, they could say how many people like a certain product or sport, what is the demographic. etc etc

With regards to the membership, the 900 million is active users, who they class as loggin on with the last month or something like that...

Is it worth the money, I dont know.... What I do know it will be round for a very long time as a product....

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Jonathan

May 18, 2012 at 14:35

The problem I see is they are going to have to start charging for it if they want it to make money. And as soon as they start charging a lot of people will moving off and use other free services e.g. Google circles etc. There is also a limit on how much they can make selling advertising space on facebook pages. I'm just interested to see how the shares fare over the next year. It really does remind me of the lastminute.com floatation and none of the initial investors made any money out of that apart from the ones who carefully timed their exit.

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Malcolm

May 18, 2012 at 14:43

Adverts on Facebook? What adverts?

http://adblockplus.org/en/

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Jonathan

May 18, 2012 at 14:49

MalcolmMay, Shhhhh, don't tell everyone or their shares will be worthless.

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RL

May 18, 2012 at 15:08

SG is right in the short term (and that's the danger), but wrong in the long run. This should be treated as a long term play, as that's how it is valued. The short term hype is a distraction. I agree FB is pretty much invulnerable to head on competition. However it cannot for long be all things to all people. Eventually Facebook will face death by a thousand cuts. Small competitors will grow in defined affinity areas and suddenly FB will find its user base evaporates. DANGEROUS!

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S G

May 18, 2012 at 15:35

Agree, that FB may not be an investment opportunity. Not much is made in terms of Ads. But what if they have something else up their sleeve. Get everyone hooked on a product for example a billion people, then bring in a couple of very small charges….

I have wondered if they will bring in a membership fee. Storage sites charge, also other social sites such as dating sites. They all have users. Then comes the question how much could they charge before destroying there membership. For example I think I would happily pay around £10 a year for the email service and somewhere to keep my pictures and video and having it all in the same place to interact with family and friends. So if you take their membership and assume £5 a year membership by even half of the current members, there is a lot.

I think it was Australia they have started trials with certain pay services in facebook.

Will they start charging companies to have their own pages? So many do……

Too lose all those members, facebook will need to do something crazy, so all they need to do is small tweaks here and there.

How many changes have they made? People get upset, say they are going to leave, but after a couple of weeks they just get us to the changes and carry on.

Which other single branded product is used by so many people that has no competition??

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S G

May 18, 2012 at 15:41

Going back to point of the article….

Are the shares worth their price….. only one person knows for sure.

And that one person also has control of what is going to happen…

I personally would not buy shares in a company that I have no idea of their business

plan and the direction they are going to.

However I would buy two shares of FB, one to see what happens as a little gamble, the other to keep, just to say I am part of it!!

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Jonathan

May 18, 2012 at 17:05

They upped the price and the number of shares as demand was high.

How do they know what the demand is before they start selling them?

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Dennis .

May 18, 2012 at 18:17

Everyone is piling in on the basis that with 900m users it must be possible to make money but no one knows how. This whole thing sounds like a bubble to me but perhaps "this time it's different".

Incidentally remember when Friends Reunited was worth £120m and then they tried charging people to be able to send messages...........

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JohnW

May 18, 2012 at 19:00

I simply do not understand it. Facebook's only income is from advertising to the people who post on there. Sooner or later, probably sooner, something new will come along and we will all migrate to that and FB will be worthless! Dot Com bubble Mk2.

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Medved

May 18, 2012 at 19:57

General Motors has already pulled it's advertising because it doesn't work. It's all a bubble for sure.

But does Zuckerberg care ? I doubt it. Take the money and run.

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jon d

May 18, 2012 at 21:50

Facebook shares being sold are non-voting ones, unlike the ones that Zuckbug owns. Very few media articles have informed the public of this. Only money to be made will come from any increases in share price, with those who buy the shares being second class shareholders who have no influence at shareholders' meetings (so much for Z's "concept" of a one level world of "friends"). His company's software is intrusive, andhas a dreadful and amateurish trail of development of its terms and conditions. I used my bargepole on it and will continue to do so.

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Anonymous 1 needed this 'off the record'

May 18, 2012 at 23:25

SG when my kids were born I decided to take a picture of them every year on their birthday . They now each have a physical book with these images inside. It doesn't need power, doesn't need updating or softare ugrades and short of the house burning down will still be useable in 100 years time. It's a bit like Magna Carta which is 1,000 years old and still useable whereas the BBC domesday archive from 1986 on laserdisc is unuseable.

The message is "don't trust your life history to someone else especially on a complex technology"

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Dennis .

May 18, 2012 at 23:58

SG "Nothing new is going to come along, as the majority of users have too much invested, eg photo, and videos." Ever heard of transition tools?

I was in the IT industry for 30 years and saw dozens of presentations from Zuckerberg lookalikes, they were all very bright, straight form college, had never worked anywhere else, were convinced of their own brilliance and surrounded themselves with like minded people. Most failed.

What worries me about Facebook is that it was never designed as way to make money, it grew out of a requirement for a sort of electronic noticeboard (which is all it really is) at Zuckerberg's College and was/is very successful as a noticeboard. Google had a clear business model based on searching and dishing up adverts based on what you are proactively looking for.

The task now is to show that they can generate revenues to support the share price and that will be very difficult. Bill Gates was very successful because he had every computer manufacturer in the world selling his operating system but apart from Windows and Office Microsoft has had little success in creating major new products or businesses (they even missed the internet). History shows us that most IT companies are "one shot ponies" and find it difficult to keep innovating. To be successful Facebook has to buck the trend. For failures see SUN, DEC, Silicon Graphics, Sony, Nokia, Kodak, Rim to name but a few.

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Pike Bishop

May 19, 2012 at 12:52

Elvis is combing his hair and about to leave the building... I shall be following him closely.

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S G

May 21, 2012 at 08:52

Dont worry I have not put all my trust into one site, and photos are all backed.

Like I pointed out, I would not invest in FB, and I am not sure how they are going to make money.

Is this a bubble again as it is following the same charateristics as before maybe. But there is something different this time, the number of users and ease of access in the sense of, a lot more people have Computers a hell of a lot more have internet access, smart phones which the majority of people have. People are alot more technical savy then 7 to 10 years ago.

Friends Reunited failed as they did not the user base, and yes I use to be on it but refused to pay to be able to only a handful of people, espically then half of them I never liked lol......

You are right in saying Facebook has nothing new really from what was tried before. Only difference is they were completely lucky on timing to the market that is it.

With regards to switching, I guess a program could come out to help transition/migrate everything to a new site. Again why go through this unless the majority of friends do the same. Majority of people do not even change/shop around for supplier (gas/electric/phone) which could save them 100's a year.

Just out of curiosity, has anyone seen a recent update on how google plus is getting on?

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Dennis .

May 21, 2012 at 10:09

SG you are right about the critical mass issue which is perhaps the only important fact about FB, Google has achieved a similar state in that most people only think of it rather than Bing, Yahoo etc The big issue for FB is how to turn the eyeballs into revenue streams to justify the share price.

Incidentally you would have thought the 35mm film had a critical mass but it didn't stop digital cameras eventually overtaking it.

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S G

May 21, 2012 at 10:29

Dennis

However the 35mm film could not evolve anymore, it was a physical product, cameras however did and they became cheaper and used by more and more people, difference being their is a lot of competition in the camera market.

But just like digital cameras and other social sites, they were very expensive, did not have the quality or the functions of todays camera's. A few companies lost out big as they entered the market a little too early.

FB is software, and looking at how much it evolved over the past 7 years, stealing ideas from other programs such as MSN chat, yahoo chat. Combing annoying games and apps, that everyone seems to love and I dont!! FB will continue to steal these ideas, and build on them to stay ahead of the competition.

In a number of years I am guessing it will look and work a lot different from now.

But here is an interesting topic, what happens if Facebook went bust?? Forgeting about investors for a moment, but what if they could not cover their own costs?? What would happen to all those users, suddenly FB is gone their is no rival all those users up for grabs!!

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S G

May 21, 2012 at 10:33

Are they going to stick with being a one trick wonder? or Are they going to try and branch out into other areas? If they did this, could one of these areas bring them crashing down??

If FB is going to fail, I think there are more likely to go down the pan like that, then another social network/site to taking users away...

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Dennis .

May 21, 2012 at 11:28

Interesting facts

One of the first internet service providers was AOL which you would think wouild give it first user advantage, it is slowly going down the tubes but surprisingly still gets a lot of its revenues from people using dial up modems! Yahoo is similarly on a steady decline (I can't understand why it's still there). One of the few IT companies to survive long term is boring old IBM (just passed it's 100th birthday)

Oxford University Press had it's 500th b'day in 1987 and makes most of its' money from selling bibles and dictionaries.

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S G

May 21, 2012 at 11:46

I saw an AOL advert a few weeks back and was like "are they still around?"

We had AOL for a couple of weeks back when the internet started off, then went over to good old Netscape Navigator!! So could not comment on them.

Yahoo is an interesting comparison, and going to read about it later on to what actually happened. I remember there was always a clash between Yahoo searchers and MSN Search (A bit like Apple and PC Users) Then google came along. For me moving to google was the huge storage they offered on their email. GBs rather then 16mb or what ever it was.

Google also has their Map feature as well, which always helped trying to find places and stores.

Dennis. Do you have any thoughts on why Yahoo failed to keep its share?

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joe stalin

May 21, 2012 at 14:44

we have our answer people dont believe it eiher and want out out out. the underwriters are fighting a tide of selling down 10%+ as we speak. This could hget quite mesy iof we get another glitch.

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