Facebook, a leading social networking service with users in excess of 800 million, has today grown far beyond the expectations of most right from the time it was founded. Launched sometimes in 2004 by Mark Zuckerberg and several other colleagues of his in college, Facebook has gradually become a force to recon with in the social networking field. The company is currently seeking to raise approximately $10billion from an upcoming Initial Public Offering (IPO). Apart from making quite a number of its current stockholders instant millionaires, Facebook's IPO will impact positively on the firm's bottom line, market capitalization and performance going forward.
Facebook: A Brief History
Mark Zuckerberg according to Philips (2007) "founded Facebook while studying psychology at Harvard University." It is however important to note that even before teaming with others to establish Facebook, Zuckerberg already had several other social-networking platforms in place including Facemash and Coursematch. While Coursematch basically concerned itself with matching or bringing together individuals taking a similar course, the former was a platform that enabled individuals to rate the attractiveness of others.
Facebook was launched in February 2004. However, its original name then was "The facebook" (Philips, 2007). Initially, the membership of the new startup was largely restricted to Harvard College students and within a short while after its establishment, more than 50% of students undertaking their graduate studies had signed up. Soon, the startup was able to extend its membership across several universities across the U.S. However, it was not until mid-2004 that the startup became incorporated with Sean Parker being named its President. According to Philips (2007), the company "became Facebook.com in August 2005 after the address was purchased for $200,000." After a month or so, it became possible for high school students in the U.S. To join. This in the opinion of Zuckerberg was in one way or the other the Firm's next logical step. Soon after this, workers from a number of companies were also allowed to sign up. It also was from around this time that Facebook's unprecedented global spread begun in earnest. Indeed, as Philips (2007) notes, any individual possessing a registered e-mail address could as of 2006 join the network. It is important to note that in one way or the other, the growth of Facebook in the recent past has seen it attract investors interested in purchasing a stake of the social networking site. However, these offers have largely been rejected. According to Raice (2012), Zuckerberg who has in the past demonstrated some reluctance in regard to pushing forward with an Initial Public Offering "owns around 28% of the company and holds 57% of its voting share power."
The Planned IPO
In Raice's (2012) opinion, Facebook's IPO could turn out to be "one of the biggest U.S. stock-market debuts of all time." From the IPO, the firm targets approximately $10billion. However, this figure is largely an estimate as in its filling with SEC; the company indicated that its target figure in regard to the upcoming IPO was $5 billion. This figure in the opinion of Rice (2012) is largely a "placeholder" and hence it is more likely than not to increase. Further, it is also important at this point to note that Facebook raked in a total revenue of $3.71 billion for the year 2011 (Rice, 2012). This translated to a profit of $1 billion. Currently, the company's revenues are primarily drawn from social gaming, advertising as well as other relevant fees. However, most of Facebook's revenues stream in from advertising with the same contributing to approximately 85% of the company's total revenues (Raice, 2012). In a way, the relevance or usefulness of facebook as a global social bazaar cannot be overstated. Indeed, this is what has made the company wildly popular in the recent past. As an indicator of its popularity, Facebook has been utilized on both the social networking as well as political front. This is more so the case considering the role it played in the toppling of Middle East political regimes. All these act as indicators that the company is mature enough to successfully undertake an IPO.
Factors Likely to Determine Facebook's Share Price
There are many factors that are likely to determine Facebook's IPO pricing. Further, several other factors will conspire to impact upon the share price of the firm's stock once it starts trading. In this case, I will highlight three factors that will determine Facebook's IPO pricing. Further I will also mention a number of factors that could impact upon the price of the company's stock once trading commences.
One of the determinants of Facebook's IPO pricing is investor sentiment. In this case, if investors happen to be overly optimistic, the share price at the IPO could be higher. The opposite is true. Thus it would be quite in order to note that exaggerated investor confidence could lead to the company being overvalued by the market. Further, in this case, the company could use a surge in profitability to its advantage. When IPO listing coincides with a firm's increase in profitability like is the case with Facebook, the share could be end up being priced at a premium as invertors could interpret this as a sign of the firm's enhanced future performance.
Secondly, still on Facebook's IPO pricing, yet another factor that could have an impact on the same is size of the company. In this case, if there happens to be some uncertainty regarding the value of a firm, investors are more likely than not to demand that the price of the IPO be at a discount (lower). The lower IPO price in this case could be regarded as an incentive for risk.
Lastly, the IPO price of Facebook could also be determined by the firm's age. Based on their much longer history, the uncertainties faced by older companies are much less than those faced by their older counterparts. In that regard, younger firms could be subject to more intensive public scrutiny based on their missing track record. It hence follows that when it comes to younger companies, investment bankers could deem it fit to ensure that the offer price of an IPO is discounted in a bid to compensate for the missing track record. However, in our case, Facebook has little of no value uncertainty as its track records since its establishment is relatively well-known.
Once trading commences, Facebook's share value could be affected by a number of things including but not in any way limited to the earnings per share, profitability dividend yield, inflation, expectations regarding the overall performance of the market etc.
Facebook's Future Prospects
In the opinion of Raice (2012), "but for all its successes, the question remains just how Facebook will manage its growth into a mature, global business…" especially given the need for the firm to delicately juggle between a number of things including but not limited to profitability and issues relating to privacy. It can be noted that in just eight short years, the firm has grown to become the globe's largest social bazaar. As Raice (2012) notes, in comparison to an year earlier, the company's reported an 88% increase in revenues. This is a strong indicator of growth for the firm going forward. As I have noted earlier on in this text, a significant chunk of the company's revenues are derived from its advertising segment. In my opinion, the company could continue increasing these revenue streams given that its "membership growth has been staggering" (Raice, 2012).
I remain convinced that should it raise the actual amount of money it targets from the IPO, Facebook could seek to expand its business organically. The expansion in this case could be in terms of revamping as well as setting up new infrastructure, engaging the services of more engineers etc. In seeking to enhance the already existing infrastructure, the company could allocate more resources towards the enhancement of the privacy of users. Indeed, as Raice (2012) notes, the company has been on the spotlight in the recent past with questions being raised regarding how committed the firm is to the privacy of users. On the other hand, the company could choose to use the pile of cash gathered from the IPO to initiate acquisitions. In this case, the company could seek to acquire smaller internet companies for a variety of reasons including but not in any way limited to harnessing the talent of key employees in the acquired companies or enhancing its diversification. It is also important to note that the company has a wide range of other businesses to either grow or explore using the IPO funds. For instance, social gaming is just one example of the areas the company could use as the next frontier for growth.
In conclusion, it can be noted that with all indicators showing that the upcoming Facebook IPO will be a success, proceeds from the same will give the company a new edge by enabling it to enhance its already existing capabilities whilst pursuing…