As Facebook enters into the quiet period after filing its S-1, a form that announces their plan to become a publically owned company, there is a general sense of lip-licking anticipation in investment circles as the pros and cons of the filing are weighed.
Facebook plans to raise $5 billion from their IPO, but most of the meat to be made on this deal will land in the pockets of original investors, long-time employees and the "one percenters" who will be given first dibs on the stock offering. Though there will be a few bones left to pick once the stock is available to the public, this stock is being rated as a "Do Not Buy" for the average investor by many tech-sector analysts, such as Molly Wood, a contributor to CNet.com.
"There are a lot of reasons investors and financiers are pushing hard for a massive Facebook IPO--reasons that have nothing to do with you and your portfolio," said Wood in her Feb. 1 article entitled "Wall Street needs a win." In the filing that "is estimated to generate some $500 million in fees for the investment banks involved," there is a lot of pressure for big backers to get in early . It is typical for tech stocks to jump drastically in value within the opening hours of trading and remain high for an extended period of trading quarters before falling back to original IPO prices or lower. One exception to this rule is Google, whose stock was originally traded at $85 per share and now, eight-years later is valued at $600. Facebook's projected $5 billion IPO will smash the record set by Google in 2004 when it raised $1.7 billion, but there are some quantitative considerations that should be made, such as the CPM, or cost per mille. This refers to the amount of revenue the company receives for every 1,000 views, or impressions. According to Kenneth C. Wisnefski, founder and CEO of leading search engine optimization and online marketing firm WebiMax, Facebook is way behind the power curve, "earning a mere 22 cents while the industry [CPM] average is around 50 cents and rival Google is earning $2 - $4" according to his Feb. 7 contribution to the International Business Times.
"Prior to their IPO, Facebook should invest their resources in to improving CPM and convincing consumers that increasing brand awareness is generating return on investment (versus soaring CPM margins). Focus on these two areas can help the company improve their positioning and continue to attract attention from marketers and advertisers," said Wisnefski.
Until Facebook figures out how to increase its revenue stream, the company may be overvalued, at least on the trading floor. Although Facebook boasts 845 million active users, many of those users are checking in on mobile devices and through apps. None of these users encounter any ads, and as such, they lower the CPM average for the company quite a bit. In order to raise that number, Facebook will probably look into ways to successfully integrate advertising streams aimed at app users, which leads to the looming question on the minds of the general Facebook public: What does the IPO mean for its registered users, their data, and the interface?
Considering that Facebook is a company that admittedly sells user data as part of its business model (data not available to the actual users in many cases, as a recent court filing in Australia has shown), some users are wary that this practice will intensify once the company has gone public.
It is expected that Facebook will gradually wade into any changes in their advertising schema, since those kinds of changes can be delicate. The last thing Facebook wants to do right now is drive users away because of ill-conceived or intrusive new ad layouts, this according to James Lenz, associate director of the El Paso Finance Center at the Jones Graduate School of Business at Rice University in his communication with Jill Duffy, a junior analyst at PCMag.com.
"Relationships take time to build, but can quickly be destroyed. There have been recent cases where a company has tried to increase profits by trying to monetize its clients further, and the plan backfired, Netflix being a prime example," said Lentz according to Duffy's Feb. 2 article.
In a letter to investors drafted by Facebook founder and CEO Mark Zuckerberg, the intent of the company is to increase its revenue through partnering up with and bringing in advertising revenue from companies that produce goods and services that are "social by design."
"We have already helped more than 800 million people map out more than 100 billion connections so far, and…we hope to [use these connections to] improve how people connect to businesses and the economy. We think a more open and connected world will help create a stronger economy with more authentic businesses that build better products and services," said Zuckerberg.
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