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Facebook IPO could redefine the social media market

Business

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February 01, 2012|By Michael B. Farrell

Can an initial public offering from Facebook reverse the Wall Street curse on social media companies?

Facebook could file to go public as soon as today, and its offering could raise up to $10 billion - enough to revive a tepid market for Internet stocks, analysts said, and seed the ground for future offerings from social media companies like Twitter or Yelp Inc. Facebook’s market value may reach $100 billion, placing the social media giant on par with such corporate titans as General Motors Co. and Visa Inc.

Initial public offerings from social media companies have been underwhelming. The daily deal site Groupon Inc., professional networking service LinkedIn Corp., and online game maker Zynga Inc. all went public in 2011 to great hoopla, but with disappointing results. Groupon has been trading barely above its $20 opening price, and shares in Zynga, which raised $1 billion when it went public in December, only recently fetched more than their $10 debut price. LinkedIn soared after its market debut in May, doubling in price on its first day of trading, but investors have since cooled on the company’s stock.

So far, the markets have been skeptical about the long-term growth potential of these social media newcomers to Wall Street, according to Carl Howe, a technology analyst at Yankee Group, a Boston research firm. “What’s not so obvious is how you make money on them,’’ he said. “When they go public, you find out exactly how well or how poorly companies are doing at monetizing those eyeballs.’’

With 800 million users worldwide, Facebook - founded in a Harvard University dorm in 2004 and now based in Palo Alto, Calif. - is the world’s most popular social network. If the company does raise $10 billion in its initial public offering, the mechanism by which companies first sell stock to the public, it could redefine the social media sector for investors.

“Everybody will look at Zynga, Groupon, and LinkedIn, using the financial metrics that Facebook publishes,’’ said Howe. “It will be the milestone that tells people how to really evaluate the value of social media companies.’’

Facebook’s filing will offer a first look at the company’s finances, which have long been the subject of guesswork by outsiders. The research firm eMarketer Inc. estimated that Facebook made $4.27 billion last year in revenue, mostly from advertising. But the real question is whether Facebook can increase those revenues, said Catherine Tucker, an associate professor of marketing at the Massachusetts Institute of Technology’s Sloan School of Management. “The big mystery about Facebook’s IPO is about future revenues,’’ she said. “It’s not quite clear where new growth is going to happen.’’