Editor’s note: This article was first published in February 2012 on 2 February 2012, the day after Facebook filed for its IPO and before it went public in May 2012. Its user figures, the 1 billion user goal and Google+ as a rival are from that point; Google+ was shut down in 2019.
Facebook is preparing to go public. The interest and anticipation have been such that, according to TechCrunch, the SEC website crashed under the number of visitors looking for information about the company’s accounts. That same tech news site (TechCrunch) has spent the last few days publishing all the relevant information about Zuckerberg’s company.
Mark Zuckerberg, the billion-dollar man
In 2004, Facebook had revenue of $382,000. In 2005, it brought in $9 million. In 2006, $48 million, and in 2007 it managed to bring in $153 million. We’re talking about revenue, not profit, since losses haven’t been taken into account. It was from 2008 that Facebook became a fully profitable company, bringing in $272 million in revenue, with a net profit of $216 million.
In 2009, it brought in $777 million, with a net profit of $290 million. In 2010, Facebook reached revenue of $2 billion and a net profit of $606 million.
2011 was the company’s big year: it brought in $3.7 billion in revenue and made a net profit of $1 billion.
Risk factors for Facebook
Following the old stock market saying that past results don’t show the way forward, the question is whether Facebook can keep up this pace of growth, or whether the social network will instead hit a ceiling in the near future.
For now, Facebook’s biggest risk factors could be mobile, governments, slower growth and Google+.
It makes sense, and Mark Zuckerberg has said as much, that new users are growing at a slower pace than in the early days or three years ago, although the average time each user spends on the platform has increased.
The difficulty of entering certain countries, such as China, Iran, North Korea and Syria, where the social network is almost entirely restricted, is also holding back Facebook’s growth. If it could enter these countries, Zuckerberg is confident that the social network would far exceed 1 billion users, although that’s a figure he aims to reach even without entering China.
US laws, as well as the changing privacy regulations in different countries, could increase Facebook’s costs and hold back some of its growth.
Mobile technology, the platform of the future, is also a heavy burden for Facebook for now when it comes to monetizing the social network. That’s where it faces an added difficulty, given that most mobile operating systems are Android (Google) and iOS (Apple).
We have to bear in mind that Android could give preference to its own social network (Google+), so Facebook might have no choice but to release its own operating system so as not to depend on its competitors. Zuckerberg has acknowledged that if mobile connections increased significantly tomorrow, Facebook’s business could be badly hurt, since it hasn’t yet monetized its mobile platform effectively.
See also: Steve Jobs’s success: the early days of Apple
Finally, one of the biggest risk factors Facebook faces is competition, and not only from rivals such as Google+, Twitter and LinkedIn, but also from other advertising platforms: supply keeps growing, and targeted advertising on the internet is becoming more and more varied. This may be one of the points that could hurt the big social network, since it has emerged that 12% of Facebook’s revenue comes through Zynga. The rest is advertising revenue.
Will it be a profitable investment?
When we talk about tech companies, we’re always talking about the short term, because in the long term, as Warren Buffett rightly says, who knows where these companies will be or what shape they’ll be in. Facebook is attracting investor interest; in fact, the company’s shares have traded on the secondary market at a P/E ratio of 100, which is sheer madness.
Tech companies such as Groupon and LinkedIn surprised us all when they went public, although the surprise came later, when their value started to fall. With Zynga, we expected a warmer reception and a rise similar to those of the companies just mentioned, given that Zynga did have a proven business model, unlike LinkedIn and Groupon (which was losing money when it went public). And we got it wrong: on the day of its IPO, it ended up trading below its offering price.
So Facebook could surprise us for better or for worse, and few people could predict the path the company will take. If we use logic to invest, the truth is that many investors are eager to buy shares in one of the biggest companies in the world, but it’s also true that Facebook runs the risk of becoming pure speculation on the day it goes public, just like Zynga. Personally, Facebook isn’t one of my favorite companies to hold in a portfolio.
Featured image: Guillaume Paumier, CC BY 3.0, via Wikimedia Commons.
