Analyzing Facebook’s Financial Statements

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Facebook finally filed its prospectus to go public, expecting to do so in the spring. Although the valuation of the firm is still being disputed, estimates suggest that the social media giant will have a comparable market cap to McDonalds. Not surprisingly, Facebook will trade under the ticker “FB” although it still remains to be decided whether its shares will trade on the New York Stock Exchange or the NASDAQ.

Strong Income Statement

Facebook has seen its revenue grow substantially from 2007 to 2011, increasing from $153 million to $3.7 billion. There are a number of key factors which differentiate Facebook from other tech companies which have gone public in the past year. For one, between 2010 and 2011 Facebooks revenue growth was 88% while Groupon (NASDAQ: GRPN) and Zynga (NASDAQ: ZNGA) recorded year-over-year growth rates of 426% and 134%, respectively. Facebook’s revenue growth has even been slower than that of struggling Pandora (NYSE: P) and LinkedIn (NYSE: LNKD).

However, there is a few major differences between Facebook and these other highly publicized IPOs – Facebook has been profitable since 2009 and has seen its net income rise to $1 billion. Groupon, on their other hand, despite its stellar growth had an operating loss of $214 million during the 9 month period leading up to its offering - it will be releasing its end of the year results on February 8th. Zynga's performance has been fairly flat, as it reported only $12 million of earnings on sales of almost $200 million. Likewise, Pandora's basically breaks even as the corporation lost $2.4 million in 2011; despite initial hype, many analysts are now questioning the overall business model and profitability potential of Pandora. LinkedIn, the company most similar to Facebook, also finished its latest reporting quarter in the red with a loss of $1.6 million. Facebook is different than these other online players as it is already generating billion dollar earnings.

Between 2010 and 2011 its net operating margins have remained in the vicinity of 30% (falling slightly from 31% to 27%) as the company devotes more funds into staff and research & development. Over the last year R&D costs jumped 169% to $388 million and G&A expenses increased by 131% to $280 million. In a letter to shareholders Mark Zuckerberg reaffirmed his commitment to continue spending funds in order to improve Facebook, stating "We don't build services to make money; we make money to build better services."

Business Growth

Facebook generates 85% of its revenue from advertising accounts with an additional 12% coming from Zynga related transactions of virtual goods and payment processing. The sale of virtual goods continues to be a small but growing part of Facebook’s business model. Netflix (NASDAQ: NFLX) and The Washington Post Company are among Facebook’s largest clients. Between 2009 and 2011 Washington Post spent $0.6 million, $4.8 million and $4.2 million while Netflix spent $1.9 million, $1.6 million and $3.8 million on advertising.  As Facebook continues to expand into new markets, it will be looking at new businesses in diverse geographic regions as a vital source of growth.  In the filing documents management notes:

"We plan to continue the international expansion of our business operations and the translation of our products. We currently make Facebook available in more than 70 different languages, and we have offices or data centers in more than 20 different countries. We may enter new international markets where we have limited or no experience in marketing, selling, and deploying our products. For example, we continue to evaluate entering China. However, this market has substantial legal and regulatory complexities that have prevented our entry into China to date. If we fail to deploy or manage our operations in international markets successfully, our business may suffer."

Healthy Balance Sheet and Cash Flow

At the end of 2010 Facebook accumulated $250 million of long term debt, by 2011 this amount was paid off. Rather than approximately $400 million in capital lease obligations, Facebook does not carry any debt but holds $1.5 billion of cash on its clean balance sheet in addition to $2.4 billion of marketable securities. Surprisingly, Facebook records only $162 million of goodwill and intangible assets, approximately only 3% of its total asset book value. With pro forma working capital of $4.03 billion, Facebook has a very strong balance sheet. Furthermore, Facebook also has stable cash flow generating operations as it recorded $470 million in free cash flow in 2011, a year-over-year increase of 150%.

Conclusions

The social media giant supports healthy financial statements which indicate that the site deserves the high valuations forecasted for the initial public offering. Facebook’s IPO will most likely be the biggest financial event of 2012, assuming that the Eurozone doesn’t collapse, especially for those who were lucky enough to acquire early shares in the company. The number “1,000” has been thrown around recently to estimate the number of overnight millionaires that Facebook’s offering will create upon its offering.

Zuckerberg, who owns 28.2% of the shares is expected to walk away with a cool $28 billion, making him the 9th richest person in the world.


Motley Fool newsletter services recommend Netflix. The Motley Fool owns shares of LinkedIn. apinkasovitch has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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