Facebook stock is now on the open market at $38 per share. The company has raised the largest IPO in technology history and is the top social network worldwide, but will the company be able to generate enough revenue to justify its IPO valuation?
Facebook’s $16bn IPO has made it the largest technology IPO in history. Thompson Reuters ranks it as the 3rd largest IPO in the United States behind visa which raised $19.7bn and General Motors which raised $18.1bn.
However, Facebook will need to make at least $30bn a year over a five year time span to justify its IPO standing.
"Facebook will need to generate annual revenue of $30-$40 billion in order to justify the likely IPO valuation of the business," says Victor Basta, managing director for Magister Advisors. "This is a ten-fold increase over the revenues that it currently generates. The question is "where from?"
"Advertising is fundamental currently, and Facebook will have to channel ad dollars away from other players and onto its platform to achieve this. Enhanced services to companies would also be a logical step."
Many analysts have said Facebook’s valuation is too much but some say the company’s $100bn is right on target.
"With growth decelerating, many commentators have judged Facebook’s $100bn+ valuation to be far too aggressive," says Alex Mifsud, CEO of Ixaris. "However, Facebook has developed a number of innovations for monetising the platform which have the potential to increase its profits exponentially. Facebook Credits are a prime example of this. Facebook keeps 30% of all proceeds generated through this virtual currency. In fact, the majority of Facebook’s revenue comes from people using Credits to buy virtual goods within games."
Facebook’s rapid increase in revenues over the years shows the company’s revenue speed is increasing with time.
The social network went from zero to $150m in revenues within 3 years. Basta says the increase represents "a 40-fold acceleration" which with the right model will continue to gain speed.
Facebook will have to constantly come up with ways to keep its users engaged as well as avoid social fatigue.
Basta suggests that even though Facebook has a large user base, venturing into the enterprise market may be the next best strategic move for Facebook.
"Facebook to date is a consumer-facing business – and is in effect the biggest and most successful vanity publishing project of all time," says Basta. "It has a user base with the population of a continent – the first digital continent. The question for management is "where next?"
"One logical direction would be the enterprise market – looking at ways in which Facebook can be at the heart of employee-to-employee communication and collaboration. A business like Yammer, which operates a private social network service for businesses, is a good model for what Facebook for companies could evolve into."
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