The much anticipated Initial Public Offer (IPO) of Facebook is just around the corner and understandably there is a lot of excitement surrounding the same. As per news reports, the company is expected to raise US$ 10 bn through the IPO, thereby implicitly valuing this social media giant in the region of US$ 75-100 bn.
The immediate question that probably comes to one's mind after getting into the numbers could be - Is Facebook really worth US$ 100 bn?
For one, if the company does manage to pull off the IPO at the desired valuation it would join the elite league of largest public companies like McDonalds and Amazon.Com. However, note that one of the companies here is a direct consumption play (McDonalds) while the second one (Amazon) offers a channel for consumption play. Both are sound business models in itself. However, Facebook is a social networking site mostly dependent on advertising revenues. Secondly, the popularity of such businesses can change at a drastic pace depending upon the changes in perception. Remember Orkut? Hence, taking a longer term call on such businesses is extremely difficult.
Thirdly, Facebook already has 800 m users at the moment. Thus, it would not be wrong to say that most of the internet users interested in social networking already have a Facebook account. Hence, growth from the current levels might plateau out and churn can become a main challenge for the company.
Further, one also needs to pay heed over the emergence and sustainability of the business model. True that Facebook has achieved brilliant success within a span of 8 years since it was launched in 2004. However, rewind yourself to a decade back. If someone would have asked you then to load your pictures/update your status on some website do you think you would have agreed? While perhaps some would have agreed to it, for many it would have been a breach of privacy. But yet after a decade Facebook seems to be the most popular social networking site! In fact, it redefined social networking. But a burger from McDonalds has seen no change in utility for decades and perhaps will never see it. Definitely, the success of Facebook was a brilliant job done. No doubt about it. However, as highlighted before sometimes perceptions change for no logical reasoning.
Further, with the company being private there is little financial information available for the prospective shareholders to appropriately value the same. Thus, the valuation of US$ 75-100 bn does raise eyebrows. Hence, investors should be extremely vigilant before they become a part of such hysteria - Be it Dalal Street or Wall Street. If not they will have to burn their fingers later. Remember the Reliance Power IPO?