The Kenya Forum | Facebook IPO: is it worth 13.6 billion USD? - The Kenya Forum

May 6, 2012


With the Facebook IPO pending, we ask whether its valuation, presently at $13.6 billion is fair? We consider the ramifications also.

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Facebook IPO: is it worth 13.6 billion USD?

Facebook IPO: is it worth 13.6 billion USD?

Thirteen percent of the entire worlds’ population use it, it’s the second most popular website in almost every country, 8% of companies in the USA have sacked people for abusing it, 50% of UK companies ban its use at work, it will generate about $4.7 per customer this year, and after 18th May is likely to have a value 25% higher than Kenya’s entire gross national product.

Facebook is being tipped as the worlds biggest IPO (Initial Public Offering) launch, having hiked the share value to $35 to raise $13.6 billion, the notional value of the company would be around 100 billion dollars, the final date for adjusting this will be 17th May with trading starting the next day. Of course, what actually happens will not be known until after this date, and the share value will dip, soar, or stagnate depending on confidence, buying patterns and company performance.

But to put this eye-wateringly high value in perspective Google, the internets No.1 company had its IPO in 2004 with a value of $23 billion being reached, (its now grown to $200 billion). Other recent notable high level IPO’s would be the Industrial and Commercial Bank of China, who raised $19.1 billion, with similar amounts being raised by Japans NTT (telecoms), Visa (credit cards) and Italy’s Enal (green power).

So why is Facebook rating itself so highly? The answer lies in at least two directions, firstly the level of information that Facebook has on its users, both in demographics (age sex place etc) and psychographics (what you think feel etc) gives it a precision edge for advertisers. When I log on to Facebook up pops the adverts for Nairobi restaurants, Cheki, Bidorbuy and Elitesystems… all my favourites… they seem to know what we’re looking for, and this gives them an advantage over other internet advertisers when selling the adverts which accounts for 80% of turnover.

Further to this Facebook have recently spent $388 million on research and development and acquired 650 patents for $550 million to strengthen there search and analyse capabilities. Secondly, Facebook are banking on growth in the mobile market and their future ability to tap into the riches which will emerge via sales advertising and apps.. The mobile market globally is the fastest growing area of internet connectivity. By next year its predicted that mobile internet users globally will pass static line users.

This trend in equipment downsizing has been a constant feature of the industry,  from mainframes in the 60’s, mini-computers in the 70’s, desktops in the 80-90’s and laptops in the 00’s, tablets and large screen smartphones (‘padfones’) are ‘now’ the future.

The great Facebook IPO: Should you be buying shares?

So should we all rush out and buy Facebook shares? Well, we would advise caution.

Its a rotten economic climate, particularly in the west, for anyone offering an IPO, but there may be sufficient investors looking to make a quick killing in an otherwise dead market, these investors are not long term friends of anyone, prices rise, they sell, and prices tumble, when the hype is over. The huge interest generated in this IPO may turn thus out to be its downfall. Next is the market conditions within Facebook.

This last quarter they announced a reduction of profits after seven years of constant growth. The company is just ‘too young’ to be part of the seasonal fluctuations associated with more mature companies. Everyone knows the first quarter is a low spot for advertising but Facebooks’ growth should have exceeded the downturn, it seems it hasn’t, which means that their growth has slowed or they are failing to impress the advertisers (who, we mentioned earlier are the majority income source) Mark Zuckerberg the CEO of Facebook himself has admitted that the growth cannot continue indefinitely, and hinted at cleverer ways to make revenue.

With the money  put into development research and patents the company may well have a bright future, but history tell us that these things take time and are risky, and even long term investors may be looking for some instant gratification. With a turnover of $4.37 just hit with a seasonal drop of 7% (income) potential investors will most likely be rattled by the drop in profits (12%) . ‘Our fortunes are just around the corner’ may not be enough to hold their interest. At this level of business with an extravagant IPO the company has got to show strong growth and profitability, this last quarter has not helped at all.

The great Facebook IPO: Why we’re not rushing to buy

The last reason why we are not rushing out to by shares has deeper roots. It goes back to the “dot com bubble” bursting in the early 2000’s. The model developed was for a new company to gain as much market share as quickly as possible, usually by giving away services etc for free,. then to entrench and sell services etc to its newly found customers.

The model was a disaster, but not so dissimilar to Facebook. During the bubble burst, huge dot coms went to the wall (, etc) a few survived notably Cisco and Amazon. Cisco and Amazon where knocked to there knees by the pulling out of investors and simultaneous collapse of there markets, but survived against the odds, and for good reasons, they had infrastructure, developed systems, and they made, or bought in, and sold useful things.

These companies had a REAL use in the modern world, and both are doing exceptional well today. Similarly the abovementioned IPO’s of ICBC, NTT,Visa and Enal have all grown, and turned out to be a good bet, because people use their services and buy their goods, they are all integral parts of the worlds trading systems… And then there is Facebook. A social utility or virtual community, a chat room for groups of friends, a fashionable fad which can be easily and cheaply replaced by the next fad. Has it got legs like Amazon and Cisco? Can it turn itself into something indispensable to the internet? Is Mark Zuckerberg the man to steer this ship into the future (or will he retire…he’ll be worth over $20 billion after the 18th of this month). Only time will tell, but whereas we ‘see’ Google and Amazon being around in 20 years time we don’t somehow have the same vision for Facebook.

Our question to readers is “Will you still be on Facebook in 20 years time?”


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