Facebook Files for $5 Billion IPO

Michael Convente February 1, 2012 1
Facebook Files for $5 Billion IPO

It may have come after the closing bell, but yesterday’s reports were correct – Facebook has officially submitted paperwork with the Securities and Exchange Commission for an IPO in hopes of raising at least $5 billion.  If all goes according to plan, Facebook stock should be available for public purchase some time in May 2012.  Morgan Stanley will lead the way in assisting Facebook with its filing.  Goldman Sachs, Barclays Capital, and several other investment firms will also be involved.

Facebook’s S-1 filing is currently available online on the SEC’s website, and I have done a quick read.  There is a lot of data presented, both in terms of users and financials, but the overall trend is clear – Facebook has had a remarkable past six years with exponential growth in worldwide users and revenue.  Facebook is so massive and wired into our culture now that it may be hard to believe that just five years ago Facebook had only 12 million active users worldwide (compared to 845 million worldwide today).  Importantly for Facebook and potential investors, revenue growth has been just as substantial.  According to the S-1 filing, Facebook first entered into seven-figures in 2006, when it generated $9 million in revenue.  Compare that to 2011, when Facebook generated a staggering $3.7 billion in revenue.  That is an increase of 41,111% in revenue in just five years.

Revenue growth is always desired, but if you don’t generate a profit, investors will rightly be skeptical.  The good news for Facebook is that it is extremely profitable, and perhaps surprisingly, Facebook actually generated its first profit back in 2009.  According to the S-1 filing, net income (i.e. – profit) for Facebook was $229 million in 2009, their first year of profitability.  Profit rose to $606 million for 2010, and is at exactly $1 billion for 2011.  That is remarkable profit growth, a strong positive sign for potential investors.

Summary of Facebook’s user base and financials throughout its existence

An interesting part of Facebook’s S-1 filing is the source of their revenue.  As recently as March 31, 2010, over 99% of Facebook’s revenue ($340 out of $345 million for the preceding 3-month period) was generated via advertising.  However, while Facebook still generates the overwhelming portion of its revenue from advertising, it has increasingly generated revenue from other sources, which are termed “payments and other fees revenue” in the S-1 document.  For the last 3-month period ending in December 31, 2011, Facebook generated $1.131 billion in revenue, $188 million of which was categorized as “payments and other fees revenue”.  This amounts to 17% of total revenue, and the percentage has gradually but steadily increased the past two years.  Facebook attributes this strong growth in non-advertising revenue to its introduction of the Facebook Payments platform introduced in 2011, in addition to increased total users of Facebook Payment applications, like games from Zynga.

Another important consideration for potential investors are the self-reported Risk Factors.  Facebook acknowledges that much of its revenue growth has been based on rapidly expanding their user base.  As Facebook reaches full market potential in its user base, the company will have to increase per-user engagement and value in order to keep revenue and profits growing.  As stated in the S-1 document, “To the extent our active user growth rate slows, our business performance will become increasingly dependent on our ability to increase levels of user engagement in current and new markets.”  Other notable listed risks include “users increasingly engage with competing products” and “we are unable to manage and prioritize information to ensure users are presented with content that is interesting, useful, and relevant to them.”

And finally, in case you were interested, Facebook CEO Mark Zuckerberg earns a base salary of $500,000 per year.  It’s likely he doesn’t even notice this, considering he is worth $17.5 billion.

Facebook will be listed under the ticker symbol “FB”.  It is yet to be determined which exchange Facebook will be listed on.

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