Facebook’s upcoming IPO has tongues wagging on Wall Street amid expectations the social networking site could fetch up to a US$100-billion valuation, and make founder Mark Zuckerberg and many of his employees very rich in the process. That includes a homeless graffiti artist who painted the walls of Facebook’s original Palo Alto, Calif., headquarters and took his payment in stock (now worth as much as $200 million). But, while there’s no questioning Facebook’s popularity, with nearly 850 million users and counting, several potential investors are still scratching their heads over the company’s business.
A close look at Facebook’s filings with U.S. securities regulators last week revealed a company that’s very much a work in progress. Though Facebook is profitable with enviable margins—it earned US$1 billion on revenues of $3.7 billion last year—there’s still a lot of revenue growth that needs to happen to justify a US$100-billion valuation. Google Inc., for instance, had a price-to-sales ratio of 8.7 when it went public in 2004, according to financial website MarketWatch. Facebook’s is closer to 26.
Investors clearly have huge expectations for Facebook’s future given its ballooning subscriber base, the growing number of hours users spend on the site each day, and the fact that few people ever delete their profiles for fear of being cut off from their vast network of “friends.” The belief is that advertisers will find it all an intoxicating elixir. “With close to a billion users, this is the Web story of the decade,” says Carmi Levy, an independent tech analyst and writer.
But in order to grow sales, Facebook either has to figure out a way to put more ads on its relatively spartan-looking website, or charge advertisers more money for them. Zuckerberg knows that advertising will only work on the site if it doesn’t get in the way of content. But that has so far proven to be a tough balance to strike, judging by the number of times he has landed in hot water over his handling of users’ private information. And now he’s going to have to figure it out with millions of investors and dozens of Wall Street analysts breathing down his neck.