Facebook has tremendous potential to become a cash-generating machine, but can it capitalize on its opportunities?
A Lego model of the Facebook logo sits on the desk of a programmer inside the company’s office in Palo Alto, Calif., in June 2009.
That’s the question plenty on Wall Street are asking themselves each day once Facebook filed its S-1 IPO prospectus with the Securities and Exchange Commission. The social network boasts an impressively large–and engaged–user base. nonetheless the corporate hasn’t absolutely puzzled out the way to create cash off of them.
Investors are clamoring to urge a hold of Facebook stock, with several hoping to urge in before the corporate figures things out and therefore the stock takes wing.
“I assume Wall Street’s reaction are quite positive,” said Timothy Loughran, a finance professor at Notre Dame. “Lots of investors wish to have Facebook.”
The asset that Wall Street is primarily staring at is that the user base. over 1/2 the 845 million monthly users really log in to the social network on a each day. The result has been spectacular growth in its prime and bottom lines. In 2011, the corporate saw revenue double to $3.7 billion, whereas its profit grew sixty five p.c to $1 billion. Over the past 2 years, its revenue rose nearly fivefold, whereas its profit over quadrupled.
“The numbers show clearly that not solely is social media not a passing fad, however there is some real cash to be created here,” said Michael Gartenberg, an analyst at Gartner.
Facebook already overvalued?
Facebook’s current financials and fundamentals look solid, however there are questions about its future, said Trip Chowdhry, an analyst at international Equities.
The monetary figures do not look thus rosy to everybody. Loughran noted that its revenue figure equates to roughly $4.39 per active user, that he said was surprisingly low. Assuming that revenue-per-user figure remains constant, if Facebook gets to $3 billion users, it’ll solely be ready to generate $13.2 billion–an spectacular quantity, however not one that justifies a $100 billion valuation.
“That strikes me as slightly expensive only if Facebook already incorporates a sizeable share of the earth’s population as active users,” Loughran said.
Chowdhry said that the corporate ought to be valued nearer to $50 billion to $60 billion, which investors would not see a lot of come if they bought in on top of that level.
It’s concerning the platform, Still, others are additional optimistic that the corporate are ready to generate additional revenue per user down the road. One analyst, who did not wish to be named as a result of his firm hadn’t cleared him to speak concerning the corporate, said plenty of the potential comes from Facebook’s position as an app platform.
Farmville and Words With Friends maker Zynga is Facebook’s single biggest contributor of revenue, chipping in twelve p.c of the overall in 2012, in line with the filing. however the potential lies in numerous apps, services, and business models running on prime of Facebook–things that transcend social gaming.
In this instance, Facebook will not be within the lead, however can facilitate foster the event of those new apps, the analyst said. He believes the “opportunities are immense.”
Facebook noted in its filing that it does not nonetheless run show ads in its mobile app–a drawback as a result of an increasing quantity of individuals register on Facebook through a smartphone app. however that would additionally gift a chance down the road because the company faucets into another attainable revenue stream. For all of his considerations, Chowdhry acknowledged that Facebook’s ability to innovate on new services and business models has already been spectacular.
Challenges to monetization : Facebook can ought to tread gently if it needs to get additional revenue from customers, which can partially embody additional ads. there is the danger that the increased variety of ads can muddle up the location and switch users off on usage. How Facebook navigates that issue whereas boosting its revenue growth are one thing Wall Street can want answered.
“Facebook has to be terribly careful,” Gartenberg said. “An sad user isn’t an engaged user.”
That’s a haul that MySpace encountered, because it begun to post additional ads and lose management of the planning of its website, resulting in Facebook usurping it because the leading social network. Chowdhry warned that identical factor might happen to Facebook if it pushes ads to aggressively.
There’s already an alternate social network in place: Google+. whereas Facebook is by so much the world’s largest social network, Google+ has created huge strides since its launch in June. Facebook, meanwhile, can have to be compelled to work out the way to run ads on its mobile app if it needs to form any cash in that area–which is essential as individuals pay longer on their cellphones than ever before. however given the tiny screen property, it’s unclear how it will deliver ads while not irking individuals.
Facebook depends client knowledge and preferences, that is a smaller amount helpful to advertisers than the search-based knowledge that Google offers. By its nature, an enquiry suggests immediate user interest, that is additional valuable to an advertiser. As a result, Facebook cannot get identical reasonably advertising greenbacks Google commands. that would modification if it goes into the search business itself. The ultimate gauge of Facebook’s worth will not occur for an additional few months, when its stock gets its initial public providing. Until then, analysts can privately think about the numbers because the company goes on a road show to drum up investor interest.
It may well be an extended few months.
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