The highly anticipated flotation of the year went ahead on Thursday 17th May. Facebook was the largest internet flotation in history and was also the 3rd biggest public offering in U.S history. 421 million shares were sold at $38 valuing the company at $104bn (around £65bn).
The key talking point around this flotation appears to be; has Facebook stock been overvalued? There has been a large amount of hype and publicity in the run up to the flotation due to its profile resulting in an inflated stock price. Facebook is a hugely recognisable company, which is a part of many of our lives. Many of us rely upon it from day to day, and some would say they are addicted.
When you take into consideration the earning potential of Facebook, it is difficult to see how this company can be valued so highly. In 2011 it had revenue of only $3.6bn. With such high valuation of shares and with very little actual revenue, returns to the investors may be very minimal. This very flotation will bring people back to the memories of the dot com bubble, where many internet start-ups floated themselves on the market with high expectations, and the market crash following. The valuation of Facebook has put it in the ballpark size of the likes of McDonalds and PepsiCo. These types of companies make in profit what Facebook makes in revenue.
Investors in Facebook expect them to be able to increase their revenue streams through the use of advertising through Facebook. They have 800 million active users in which companies can selectively advertise too. Never before have adverts been directed so accurately to their target audience based on their personal information appertaining to gender, relationship status, location and interests. For example a bridal shop can tailor their adverts to users of Facebook who meet certain requirements who are female, engaged to be married, and who live in the South West of England. However, at what point does this sort of advertising become too invasive on its users and takes away the reasons why we all love and use Facebook.
Some previous advertisers have already pulled out of Facebook advertising as they did not see particularly large improvements in sales, and therefore questioning the effectiveness of marketing through Facebook. More and more people are accessing Facebook through their mobile phones with less reason to log on via a computer to keep updated. Mobile phones are usually too small to show Facebook adverts and with limited data connection many advert banners would appear too slowly. There must also be concerns at which point Facebook could become obsolescent; can it continue to innovate in order to keep users connected; will it face the same fate as Bebo and MySpace. Most products have a limited life-cycle – so when will our interest be drawn to a new social networking application?
It is worth noting that the flotation will give Facebook a huge cash injection in which it is likely to spend in buying up related companies and investments to create additional revenue streams. I would predict that we are likely to see Facebook purchasing advertising agencies and online companies which focus on supplying advertising campaigns through Facebook.
Are Facebook overstepping their capabilities as a social networking site? Only time will tell.