Is Facebook’s valuation a good investment?
Facebook is about to be floated on the stock market. For the first time it’s financial records have been made public and it has been revealed that Facebook is profitable. Very profitable. Profits in 2010 were in excess of $US1 billion. Current estimates about the company’s worth range from $US 70bn to $US100bn, although many say this is over valuing Facebook dramatically. But given the chance, would you invest in Facebook?
My first thought when I heard about a Facebook IPO was that it would definitely be a good investment. It is such a massive success story; used by over 800 million people globally and is so firmly ingrained into our society. How could it possibly not continue to be a success?
Facebook globally
However there is some debate as to whether Facebook will continue to grow at its current rapid rate. Whilst millions join Facebook in India, the Phillipines and Indonesia, the reverse is happening in the western world. In May last year 100,000 British and 6 million US members left facebook. Whilst the total number of facebook memberships may continue to rise, the shift in memberships to the less wealthy means they are far less profitable to advertisers (www.blogs.telegraph.co.uk 14/06/11). If this trend continues, facebook will become far less profitable and will open the doors for other social media platforms to take on the western markets.
Another issue is that whilst Facebook makes most of its money from banner advertising, it has a much lower ‘click through’ success rate than other online platforms. This means that whilst Facebook users may see the advert, they don’t click on it to find out more and then continue to go on to buy that product. This is a subject of some concern for potential investors. It is thought that the company’s growth may slow dramatically if it does not find better ways to increase advertising revenue without annoying its existing user base.
The hype in the USA surrounding the ‘Facebook floating’ is enormous, but many internet investors are being much more cautious because of the concerns mentioned above. It could be a great success as a public company or it could be a bit of a damp squib…only time will tell.
Do you think Facebook will continue to be a success? Would you invest in Facebook? Do you have Facebook fatigue?
Tell us your views.
{ 2 comments… read them below or add one }
Facebook is complete shite as an investment!
1. On $600m profit, the maximum current rate of return on a share would be 0.85%, assuming all profit was given back as dividend – which will not happen. This makes the robbers in the high street banks suddenly look quite generous!!
2. Therefore, for these to be a good investment one would have to assume that Facebook will be looking to increase profit by 800%, to approx $4bn-$5bn. This outlook seems overly optimistic.
3. Facebook has gone past it’s peak in the Western hemisphere, which is where profit is generated. China (the biggest market) have their own social networks and considering the trouncing that Google got in that market, one has to assume Facebook would fair no better.
4. If Facebook is looking so massively profitable in the near-term, you have to question why the early investors would be seeking to relinquish some of their stock. Answer – Facebook has peaked and they’re getting their return now, before Facebook becomes MySpace!!
In years to come, we will look back on these past few years of massive IPO’s for social websites and wonder how we got suckered in to another DotCom bubble so soon after the last. If you decide to invest, good luck and you obviously have too much money to know what to sensibly do with it.
@ John M
A Facebook IPO will be the best time to buy this stock, as it is set to soar. A $75bn price tag will look cheap in years to come, just as Apple looks cheap even a few years back, let alone a decade ago.
Just as Google went on to dominate more than one market, Facebook is set to do the same within the social networking sphere.