Facebook IPO: profit fall puts $100bn valuation in doubt

Apr 24, 2012

Fall in profits and revenues a 'disaster', raising question: has Facebook waited too long to float ?

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SCEPTICISM over Facebook's $100bn valuation is mounting just weeks before the social network is expected to float on the stock market. Following the news that profits and revenues fell over the last three months, one analyst is questioning whether Facebook (whose original profile page is presented above by founder Mark Zuckerberg) has waited too long to make its initial public offering (IPO).
Profits for January to March were $205 million – a fall of 12 per cent compared to the previous quarter.  Revenues fell nearly seven per cent to $1.06bn, The Financial Times reports.  
Facebook said profits had been eaten up by a recruitment drive, a more-than-twofold increase in marketing and sales costs and a boost in research and development from $57m to $153m. The company also pointed to seasonal factors: advertising spending – from which most of Facebook's revenues are derived - is normally much lower in the first quarter than in the final quarter.
But the fall in profits, coming just before Facebook's expected flotation in mid-March, has given analysts, who have estimated the value of the IPO at up to $100bn, much food for thought.

Sam Hamadeh, CEO of PrivCo, told The Guardian the figures were a "disaster". He said Facebook had "done everything it can to have a blowout first quarter", including increasing the number of ads served to users and introducing a new 'Timeline' look.

"This is absolutely not what they wanted," he concluded. "You have to ask: has this company peaked? We often say that companies go public too early. Could this one be too late?"

Jeff Sica, chief investment officer of SICA Wealth Management, told Australia's ABC News: "The biggest issue is the realisation that Facebook is not going to have an easy time meeting high expectations of the public market.

"Investors are still likely to sign up in droves for the IPO – but growth concerns may make some investors less likely to keep the stock in the long term."

Not everyone is pessimistic, however. While profits might have stalled, the company is still enjoying growth in the numbers of people logging on. Monthly active users were up 33 per cent to 901 million last year. More important, 488 million accessed Facebook on their smartphones. As The New York Times points out, "such users are considered extremely valuable because more data can be gleaned about them".

Debra Williamson, an analyst with eMarketer, is positive about Facebook's prospects, telling the FT: "We believe that Facebook is going through a transitional quarter that may extend into the second quarter as well.
"Facebook is now making a concerted effort to get more advertising dollars from major brand advertisers and just recently rolled out new ad products aimed at those advertisers. We're not seeing the impact of any of that yet."

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