As of yesterday, Facebook has filed its IPO in an effort to raise $5 billion. Previously, a large number of media outlets were reporting that the Internet company would file before the end of the week. They were also reporting that the company would end up valued somewhere between $75 and $100 billion.
While the value of the company remains to be seen, the filing with the SEC has brought to light much of the company’s finances. For the past three years, Facebook has managed to rake in a tidy profit, bringing in $229 million in 2009, $606 million in 2010, and a full $1 billion in 2011. The company reported bringing in revenue of $3.711 billion this past year.
To get a good grasp of its value, it is of vital importance that the source of Facebook’s revenue be mentioned. About 85% of the company’s revenue comes from ads. While this number is high by itself, what is more surprising is that number is a 10% decrease from the previous year: in 2010 ads accounted for 94.63% of the web site’s revenue. This is important because ads are a volatile source of income by nature: ads rely on the end users to generate money, but if the number of end users decline, then everything becomes less profitable immediately. Less profitability means less investors who’d be interested, and the process spirals downwards. This can be seen quite often even with big companies like Nintendo when the concerns of investors, regardless of how baseless they are, cause stock prices to plummet.
On another note, the filing has also revealed the workings of the upper echelon of the company. It would appear that Mark Zuckerberg is the best-paid employee of the company, earning a salary of nearly $500,000. For comparison, the next highest-paid employee is Chief Operating Officer Sheryl Sandberg, who’s sitting at a salary of about $300,000. However, in addition to these salaries, the CEO and COO have access to a private jet. Although the COO is only to use it for business purposes, this is not the case for Zuckerberg:
Our compensation committee has also authorized our CEO and COO to use private aircraft for business purposes. This practice maximizes such executives’ productive time and ensures their quick availability. In addition, Mr. Zuckerberg may use private aircraft for personal purposes in connection with his comprehensive security program. On certain occasions, Mr. Zuckerberg may be accompanied by family members or others when using private aircraft. For flights involving passengers flying for personal purposes, the aggregate incremental cost of such personal usage is reported as other compensation to Mr. Zuckerberg. The reported aggregate incremental cost is based on costs provided by the applicable charter company, and includes passenger fees, fuel, crew and catering costs. The incremental cost attributable to Mr. Zuckerberg’s use of private aircraft in 2011 is disclosed in the “All Other Compensation” column in “—2011 Summary Compensation Table” below.
When taking a look at the aforementioned column, it because clear that Zuckerberg is “compensated” with an amount of goods or services that exceed his own salary in value. In 2011, he was compensated a value of $783,529. This in turn means that Zuckerberg received a total of nearly $1.5 million in funds and compensation.
Finally, one should take into consideration that this is not the first tech company to file an IPO this year; Zynga filed earlier this year and fixed its stock between $8.50 and $10. However, their $90.6 million revenue in 2010 looks measly in comparison to Facebook, but Facebook attributes 12% of its revenue to Zynga alone. Regardless of semantics, Zynga’s stock performed rather poorly from the get-go. Although starting at about $10 per share, it immediately started to decline. LinkedIn experienced issues but also enjoyed some mild success as their stock climbed immediately to $122 on the first day. Unfortunately, that eventually settled back down around $90 in the days that followed.
Analysis: A lot of publications are comparing this to Google, but many are also warning people that this could simply flop. Although Google proved itself to be a great Internet company that would go to make many billions, that’s rare for an Internet company to do. A long time ago, the dot com bubble was an amalgamation of places trying to emulate similar success, and although a few succeeded, most didn’t. It’s more than likely that Facebook will end up as another MySpace one day, cease to be profitable, and then curl up and die. Until that happens, however, the site will continue to rake in a lot of cash. Because of these reasons, I also hold the opinion that this is not a stock that should be kept in mind for very long.
The bottom line is that, while it may not be wise to disregard the stock entirely, approach it very, very cautiously. It’s currently in its volatile beginning phases, and whether it sinks or swims will only be revealed with time.