Facebook (FB) recently filed papers for an initial public offering to raise $5 billion. The IPO, however, is valued in the range of $75 billion to $100 billion. The PE-backed company, being the largest and the most happening social networking site, is expected to sail through the IPO quite comfortably. However, it could be quite challenging for the company to give positive returns to shareholders (at least for the short term) post-listing, mainly due to its aggressive IPO pricing. The long-term price stability and appreciation of its stock price would depend on the performance of the company and its ability to monetize its huge user base.
We foresee some challenges that can hamper Facebook's business performance and hence, stock price performance.
Growth (in users): According to data from venturebeat.com, Facebook's coverage of the population connected to the Internet has reached nearly 80 percent in countries such as Chile, Turkey, and Venezuela and up to 60 percent in countries like the U.S. and the U.K. The company is already seeing a slowdown in growth of global monthly users. Subscriber growth in the future is likely to come from emerging markets such as India and Russia. In the near future, Facebook will need to look at attracting more corporate users on to its platform and increase their level of activity. It should also look at monetizing its large user base aggressively.
Curation sites such as Pinterest (mostly startups that have just started to become popular) may turn out to be more attractive to sponsors, since advertisements on such sites reach more focused audiences.
Platform risk: Facebook has large number of mobile users (425mn) and majority of them access their Facebook accounts through competitor platforms such as iOS and Android. Going forward, the company faces serious threat from these platforms as Google (GOOG) might prefer Google+ and Apple (AAPL) might want to go social. HTML5 could deleverage risk for Facebook to a large extent, but its success would depend on a number of factors such as risk factors, ability to attract developers, etc.
Regulations: Big data would be the most potent value driver for any portal with a high user base. However, evolving privacy laws (which are not very clear as of now) would decide the extent to which companies like Facebook can make use of the available data.
Valuation: The expected IPO is likely to place Facebook on the higher end of the $75 billion-$100 billion valuation, which seems high, given the last reported revenues and profits. Post listing, the company faces huge risk of its stock price crashing if it is not able to meet aggressive revenue and profitability targets.
Of late, highly innovative companies have been able to attract VC funding soon after incorporation at attractive valuations. Within a very short time after a company goes for VC funding, PE funds are investing at very aggressive valuations. Such trends result in overvaluation of stock during the IPO, which leaves very little scope for retail investors to participate.
Given the downside risk, retail investors may do well to be cautious.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: The views are personal views of the author and may not necessarily reflect those of Infosys.
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