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Will Facebook make investors like social media?

By Michael B. Farrell
Globe Staff / February 1, 2012
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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 tomorrow, 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.”

The site could add many users in developing countries, Tucker said, but that’s a market many advertisers won’t value.

Buyers have clearly been skeptical about Internet stocks in the past year, said Kevin Pleines, an equity market analyst with Birinyi Associates, a stock market research firm in Westport, Conn. “The market says that these stocks are too high,” he said.

In fact, said Pleines, 95 percent of Internet and social media companies that went public last year are trading at lower prices than on their opening days.

But that poor performance could just be a reflection of the overall economic slump, said Reena Aggarwal, professor of finance at Georgetown University’s McDonough School of Business. Social media stocks “have been very volatile mostly because of what’s going on in the markets, and the markets have been very volatile,” she said. “There hasn’t been a perfect time to do an IPO.”

Yelp looks like it will be the next social media company to test the IPO waters. The eight-year-old, San Francisco-based online business review site filed with federal authorities for an initial offering in November, and hopes to raise $100 million.

Many forecasters expect that Twitter, the fast-growing San Francisco messaging site with more than 100 million users, will follow in 2013.

“The Facebook IPO is good news for Twitter,” said Georgetown’s Aggarwal, “because when the valuations are set, Facebook will be used for one of the benchmarks.”

Social media companies that have gone public -- and those yet to file -- must prove their worth to investors, and that means giving marketers greater access to their users, as well as the vast amount of personal data about those users that these companies collect, said Nate Elliott, an analyst at Forrester Research in Cambridge.

“They really need to turn the data they are sitting on into effective advertising,” he said. Doing that, said Elliott, will go a long way to making the phenomenon of social media on the Web into a success on Wall Street.

Michael B. Farrell can be reached at michael.farrell@globe.com.

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