For us mere mortals who probably won’t get first crack at purchasing Facebook shares when the company goes public, the question becomes whether or not it’s a solid investment.
That will, of course, ultimately depend on where it prices. But at least one research firm is throwing up a caution flag because Facebook’s initial public offering filing doesn’t give a clear-cut plan about how the company will grow advertising revenue.
“Growth potential in display advertising, which accounts for the majority of revenue, seems limited with increasing mobile substitution in major ad markets and future user expansion largely in lower yielding countries,” Enders Analysis said in a repoPrt sent to subscribers earlier this week. “There is significant potential to increase income from payments and other businesses beyond social games, but the company’s strategy is unknown at this point.”
What that means is those revenue numbers – including $3.71 billion last year – that we all went gaga over when Facebook announced it was going public won’t mean squat to investors if the company can’t figure out how to make earnings bigger.
This is not the news social networking types want to hear after a lackluster 2011, when IPOs by LinkedIn, Groupon and Zynga all failed to live up to the pre-filing hype. People who watch the space were hoping for a “Facebook effect” that would prompt other companies, including Twitter, to follow (Twitter won’t go public for at least a couple of years, in part because it hasn’t developed the consistent revenue model investors want to see, according to its CEO).
“Social media executives will certainly benefit from the momentum created by Facebook’s offering, but at the end of the day they will still have to prove their mettle to investors,” said Lee Simmons, an industry specialist with Dun & Bradstreet. “As we’ve already seen with Groupon, lack of profitability isn’t exactly a reassuring thing to see in a prospectus.”
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