The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

This is an update to our initial Facebook forensic analysis released before Facebook officially filed for an IPO (still available for download - FB note final [7]). This update incorporates the information now available from publicly filed financial statements. Accompanying this analysis for professional and institutional subscribers is a simplified, unlocked version of the valuation model used for this report available for download - Facebook Valuation Model 08Feb2012 [8]. The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update. [9] It is recommended that subscribers (click here to subscribe [10]) review the original analyses linked above as well as the free blog posts on the topic:

Much like the company itself, the Facebook IPO has generated plenty of attention from different quarters – print and electronic media, the analyst and investor community, as well as from people who have no interest whatsoever in the company except maybe that they all have a Facebook account!

The key questions lingering in BoomBustBlogger's minds include:

Is the company really worth $75-100 billion? Apple was worth $1.8 billion on its IPO in 1980; Microsoft worth $640 million in 1986 and the more recent example of Google, which was worth $23 billion on its IPO day in 2004.
Facebook was worth $15 billion when Microsoft bought a 1.6% stake in 2007 and with Goldman Sachs $450 million investment in 2010, the company’s valuation shot up to $50 billion!
Will it continue to lead the social networking industry the way it has been in the past seven years? Would Google, with nearly a $45 billion cash war chest and Google+ in its repertoire, allow this to happen?
Is the social advertising market as big as it is made out to be?
Will Facebook capture the mobile advertising space, something that it has not been able to do so far?
From a corporate governance viewpoint, is it not a concern for investors that one very young person with zero experience running or governing a public company holds as much as 57% of the voting rights of the board?

While there has been plenty of analytical commentary both for and against Facebook in general and the IPO in particular, especially on the company’s valuations, the truth as always, lies somewhere in between. We make an honest attempt to answer some of these questions and assess whether the sky-high valuations are justified or not.

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Let’s take a look at all the good things associated with Facebook:

The sheer amount of growth the company has seen in terms of the number of subscribers has no match in the social networking space. With close to a billion subscribers and counting, Facebook has the potential to touch and change the lives of the people living in this planet like no other stream.

Some of the key facts that support this argument include...

Industry sources suggest that one out of every seven minutes spent online is on Facebook
Shift in technological trends making social networking in general and Facebook in particular a name to contend with in all aspects of life:

1. Rapid spread of internet connectivity driving Facebook accessibility. The Boston Consulting Group (BCG) estimates that over 3 billion people would be using internet by 2016 as against 1.5 billion in 2010. With more people coming online and assuming the time spent by them on Facebook remains the same, then by the end of 2016, Facebook will have over 2 billion subscribers!

We have factored this into our valuation numbers

1. Increase in mobile telephony, especially in the emerging markets, which in some sense are also the key focus area for Facebook

Over 425 million people accessed Facebook through their mobile phones in 2011 and with increasing number of people using mobile phone, this figure would only increase in the near to medium term
Shift from primarily social networking to social advertising as well:

1. Changing online consumption patterns with more and more people buying goods and services online reflecting the increasing importance of online advertising, especially through social media
2. Consulting firm Booz & Company estimates that the total value of goods sold through social media would increase six-fold from $5 billion in 2011 to over $30 billion by 2015

85% of Facebook's revenues come from advertising. With over 845 million subscribers, the scope for "targeted advertising" is enormous enough to drive the company's revenues many fold in the years to come

1. Nearly 4 million business have set up their pages on the Facebook site
2. The number of ads delivered on Facebook increased by over 42% in 2011 while the average price per ad delivered increased by 18% in the same period

However, a caveat here, the number of clicks received on banner ads on Facebook is 1/5^th the number of clicks received on the Web as a whole, according to Businessweek.com
In comparison to other major websites, Facebook also has lower click through rates for ads

1. Nonetheless, possibility of generating significant advertising revenues from mobile phone devices is immense

Facebook is doing the “reverse Google” which focuses on the online search business, accounting for nearly half of online advertising revenues in the US

1. Google has responded to defend its search turf, with the responding trend already underway by incorporating data from its social network Google+ into its search results.

Venturing into the online payments services based on Facebook Credits, currently used extensively on games - PayPal, the leading online payment giant had revenues worth $4.4 billion!

1. Zynga, the online gaming company, accounted for around 12% of Facebook's revenue in 2011. This is a double edged sword, though, for Zynga’s expectations of sequentially slowing bookings in the first half of 2012 and core game monetization is slowing more rapidly than expected.

And now, the not so good part…

Continued in the subscriber [10] download FaceBook IPO & Valuation Note Update [9].