After months upon months of planning, Facebook put out its initial public offering (IPO) on the NASDAQ stock exchange. Everyone expected Facebook to be “the next Google”, among other epithets. The offering effectively floundered, and lawsuits and Wall Street arguments followed. While it initially appears that investors did not recognize the value of the next biggest technology company, further thought would suggest that Facebook might not actually be worth $104 billion, the value at which they claimed they were worth. Facebook’s IPO was the largest of any tech company before, with Google’s initial valuation coming only to $23 billion when it went on the stock market in 2004.
As Facebook filed for its IPO, many statistics and company operations were released to the public, which showed some revealing information about Facebook’s financial situation. Before its offering, it had $6.6 billion in total assets and $1.4 billion in liabilities. The company’s revenue is $3.7 billion, with $1 billion of that in direct earnings. After Facebook’s underwriter Morgan Stanley kept the stock value artificially at $38 per share, their stock plummeted on the following Monday, with the stock currently sitting at $31.91 per share at the time of this writing. This brought the value of the company down from $104 billion to $68.23 billion.
While large tech companies are often valued higher than the value of their assets, the tech giants are typically at much more equitable ratios. Without going too much into stock terminology (of which I have an admittedly amateur grasp), the price-to-earnings ratio of Apple, the largest and most profitable company in the world, is around 16:1. This effectively means that there is $16 of Apple stock for every $1 of Apple’s earnings. Google, a more software and advertising based company with a business strategy closer to Facebook’s, has a price-to-earnings ratio of around 20:1. Facebook’s $104 billion estimated value, combined with its $1 billion in earnings, would have put it at a price-to-earnings ratio over 100:1.
A shockingly large part of their business relies on Zynga, another tech company that had an IPO recently that didn’t boom as much as expected. 12% of Facebook’s $3.7 billion in revenue comes directly from Zynga under their deal to exclusively use Facebook Credits, among other transactions between the companies. Facebook’s reliance on one social gaming company puts it in a more vulnerable position than its competitors Google or Microsoft, both of whom have diversified their sources of income.
On May 23rd, Forbes reported that all of Zynga’s top Facebook games have been losing users rapidly, with most losing one to five million active users in the two weeks previous. While they aren’t the only ones losing users, it poses the possibility that Zynga could be less profitable in the future, which in turn would have negative effects on Facebook. Facebook’s other primary source of revenue, desktop advertising, is arguably more stable for the near term future. However, they have noted that they make no money off people who use phones or tablets, which is an issue for their long term success as less people use traditional desktop operating systems.
Without a tangible, stable form of revenue, many investors likely look to avoid a second dot-com bubble as these companies that have little in terms of revenue receive valuations well into the tens to hundreds of billions. With the kind of earnings Facebook has, the $68 billion Facebook is currently worth is more fitting than the $104 billion it had expected. The other companies being brought down with it also may be realizing how much they’re truly worth.
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