Investing in $FB (Facebook)? Where’s the “dislike” button!

Posted by K on May 17, 2012
General

It’s a day before the overhyped Facebook IPO & I’ve downloaded the SEC  Form S-1 Registration Statement for Facebook, Inc. which spans 228 pages and I’ll do my best to point out the important parts for your benefit.

The IPO Price is expected to be $36-$39 per share when it trades Friday and the book value for facebook is around $30 so that’s immediate price dilution for the early birds. Disclaimer: I am not a financial advisor & I also don’t intend to get into the $FB IPO bubble and the reasons below show why you should be cautious. There might be a buck or two to be made but overall it’s a bad idea investment wise, Facebook might be a great product but revenue is what shareholders/investors need to get a return on investment.

Facebook has 901 million MONTHLY active users but just 526 million DAILY active users as of March 2012 and there were 372 million in March 2011 so the 41% increase is there so far in active users but how many click on ads? Do you?


(Sweet Ads, but do you think many people click? )

How Facebook makes money:
Advertising: They allow advertisers to target specific geographic areas or demographics based on what is shared by facebook users in terms of age, gender, etc.  Facebook hopes to get a bigger piece of the advertising pie which as of 2010 data was about $588 billion worldwide.
Payments: Selling of virtual & digital goods by app developers through the Facebook platform which includes things like games. This is a $9 billion industry that Facebook is trying to get a piece of by requiring Payments integration in games on Facebook, and may seek to extend the use of Payments to other types of apps in the future.

According to the income data listed on their page 3 Months Ended 2011 the revenue for Daily Active user was $1.97 and in 2012 was $2.01 which is an increase per user.  They did however spend more money in marketing and research and development so when you factor in Net income instead of revenue their income per Daily active user fell from $0.63 to $0.39.

If we take Monthly Active users (MAU) in 2009 revenue per user was $2.16, 2010 was $3.25 and 2011 was $4.39, net income of $0.60, $1.00, $1.18 respectively per Monthly active user.

Every company has to disclose foreseen risks in their SEC filings and below are a few that stand out:

Mr. Zuckerberg, after our initial public offering will control approximately 55.8% of the voting power.
So Mark will have the ability to control the outcome of matters submitted to our stockholders for approval including the election of our directors, as well as the overall management and direction of our company.  VERY NICE! Let’s pay for a piece of the pie controlled by one person who has the power and ability to do as he wishes with your hard earned money.

Our financial performance has been and will continue to be significantly determined by our success in adding, retaining, and engaging active users. We anticipate that our active user growth rate will decline over time as the size of our active user base increases. A number of other social networking companies that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee that we will not experience a similar erosion of our active user base or engagement levels. A decrease in user retention, growth, or engagement could render Facebook less attractive to developers and advertisers, which may have a material and adverse impact on our revenue, business, financial condition, and results of operations.

The substantial majority of our revenue is currently generated from third parties advertising on Facebook. Advertising accounts for 82% of our revenue and 18% from platforms including Zynga games. As is common in the industry, our advertisers typically do not have long-term advertising commitments with us. Advertisers will not continue to do business with us, or they will reduce the prices they are willing to pay to advertise with us, if we do not deliver ads and other commercial content in an effective manner, or if they do not believe that their investment in advertising with us will generate a competitive return relative to other alternatives.
NOTE: As of May 14th GM just stopped their advertising campaign and others may follow suit as they realize they’re not getting the expected value for their ad dollars.

We expect our rates of growth will decline in the future.
Historically, our user growth has been a primary driver of growth in our revenue. We expect that our user growth and revenue growth rates will decline as the size of our active user base increases and as we achieve higher market penetration rates. As our growth rates decline, investors’ perceptions of our business may be adversely affected and the market price of our Class A common stock could decline.

We currently depend on the continued services and performance of our key personnel, including Mark Zuckerberg and Sheryl K. Sandberg. Although we have entered into employment agreements with Mr. Zuckerberg and Ms. Sandberg, the agreements have no specific duration and constitute at-will employment.

A letter from Mark Zuckerberg (partial)
Facebook was not originally founded to be a company. We’ve always cared primarily about our social mission, the services we’re building and the people who use them.   Simply put: we don’t build services to make money; we make money to build better services.  And we think this is a good way to build something. These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits.

So there you have it the SEC form dissected, now go invest with your friends!


(Facebook IPO Investors)

K

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