Facebook's IPO Will be a Game Changer

Erin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

TechCrunch, a reputable and well-known tech media source, cited sources that indicate Facebook may launch its IPO on May 17, just four weeks away. But no matter when the Facebook IPO takes place, or how much it is valued for, it will be a unique and original case study for the future. Investors will be taking part in an historic opportunity to change the way people around the world interact and influence corporations.

The launch depends upon SEC approval which can often takes several months to come through. The mid-May date is not confirmed or guaranteed. In June 2011, Groupon filed for its IPO, which finally occurred in November 2011.

Facebook recently acquired Instagram, a popular photo-sharing and editing service, for $1 billion. The company agreed to pay 30% in cash, and 70% in stock, according to leaks from the private negotiations. The cash and stock deal would imply that Facebook estimates its own stock around $30 a share, or a total value above $75 billion, according to the NY Times. However, many experts predict that Facebook will be valued as high as $104 billion or $40 a share, which is in line with secondary market trading (This report is supported by information shared by Wall Street Journal, CNBC and All Things D).

According to filings with the SEC in February, Facebook has brought in $3.7 billion in revenue and $1 billion in profits. The company brought in $1.97 billion in revenue in 2010. Facebook earns its revenue from advertisements on the site, which accounted for 85% of the revenue. Zynga (NASDAQ: ZNGA), the social games company which hosts dozens of games on Facebook, brought in 12% of Facebook's revenue. Facebook is responsible for more approximately a quarter of online ads in the United States. However, ad sales for the company decreased in the past year, as advertisers turn back to paid search providers, such as Google (NASDAQ: GOOG) and Yahoo (NASDAQ: YHOO), Facebook's chief rivals.

Facebook's rivals include Google, Twitter and Microsoft (NASDAQ: MSFT) (Microsoft also holds a financial stake in Facebook.) The companies challenge Facebook in paid search ads, mobile applications, and users. But will they rival Facebook substantially as a stock option? Microsoft is currently at $31.29, with a market cap of $262.55B. The stock is trading towards the high end of its 52-week range, and has consistently beat the S&P 500 for the past year. It is a solid stock that has been on the rise for the past six months. While it is popular for users to complain about the company and its products, that has not changed the fact that Microsoft products are used in nearly every business and home in the United States.

Google's stock price is currently at $614.42, down a few dollars in past weeks, with a market cap of $199.77 billion. Google.com is the most popular website in the world, with Facebook coming in at number two (as ranked by Alexa. Google also publishes a top websites list, from which it excludes itself. The Google list ranks Facebook as the top site.) Google has tried to compete with Facebook as a social network provider with Google+. However, thus far, the site lags far behind Facebook in active users and popularity. However, if Google were to take some of its products one step further, by integrating Google+, Android, and others into the Chrome browser (and some experts think that they will), it could force a game changer on users, and become more of a threat to Facebook as a social sharing site. In January, Google changed search results by integrating its own social site pages (from Google+, Picasa albums, etc) into individual users' search results, and changing its privacy settings. Other sites such as Twitter and Facebook are not included in the Google search results because of their own users' privacy settings.

Twitter, which has not yet announced intentions or plans to go public, has rivaled Facebook without being fierce competition. Users can integrate Twitter into Facebook and vice versa. While rivals, the two companies do not appear to really be direct competition for each other. Their business models are significantly different, as are their primary products. However, it should be noted that because of its size and popularity with social network users, if Twitter wanted to expand or change its offerings at some point, it could conceivably compete with Facebook on some levels.

When Facebook goes public it will bring interesting new questions up for investors. Each time Facebook has made significant changes in the past, such as tweaks to the News Feed or privacy settings, or more recently the Timeline, users have rebelled. Many users threaten to revolt and leave the site with each change. Petitions are often started, claiming to have the ability to “force” Facebook to change settings. Thus far, few petitions have been successful, and the site obviously continues to grow in spite of user threats to leave. But when the company is publicly traded, and presumably stock holders will also be users with voting power and influence, will that change? Will Facebook become a new sort of social network democracy? Instead of useless petitions and complaints, users will have the power to buy up stock, and force change on the company. Or potentially and conversely, will changes such as the Timeline that bring about threats and complaints, result in investors getting nervous and scared, and selling off stock? Or will investors be able to see beyond public whining and complaining?

The Facebook IPO has the potential to become a learning tool to educate passive investors, or the public in general that does not yet understand the stock market and investing. With most American adults being Facebook users, they may have more of an interest in understanding the Facebook stock, in order to have some influence and control over the company. Google recently announced a stock split that would give its founders more control over the company, and creates a third class of shareholders that will not have voting rights. This sets an interesting precedent for other large and social companies, particularly Facebook. Will Mark Zuckerberg choose to keep the power for himself, or allow users/stockholders some influence over the company?

Facebook is also in the unique position of being one of the few companies and stocks that is not heavily impacted by the state of the economy. Users access the site for free, whether or not the economy is flush will not change how many users visit the site daily. But the economy will impact the amount of money businesses have to invest in advertising on the site. This creates the interesting question of defining who is Facebook's customer- users or advertisers? Facebook earns its revenue from advertisers, so it would make sense to define advertisers and businesses as the customer. However, if a company is in business only to please and serve a customer, does Facebook serve businesses or users? Without the users, businesses would not be going to Facebook to advertise. Facebook obviously must cater to both parties in order for its business model to work.

Facebook is also in the unique position to recruit more investors in a very passive, yet direct, way. Will the company put the stock ticker on the homepage, where users will see it regularly, thus generating interest, and hopefully demand? As an educational and awareness tool, there are millions and millions of Facebook users who may become more interested in investing, just by seeing the stock symbol and ticker on their home page. This has the potential not just to influence users into becoming Facebook shareholders, but to create millions more potential investors in the stock market in general.

The influence and reach of the Facebook IPO will not just impact Facebook. It has the potential to set new precedents in both investing, and in social networking. Just how much of an influence the company will have will be determined not only by the company, but by the media, shareholders, potential shareholders, and users.


Motley Fool newsletter services recommend Google, Microsoft, and Yahoo!. The Motley Fool owns shares of Google, Microsoft, and Yahoo!. ErinAnnie has no positions in the stocks mentioned above. ErinAnnie has consulted large and small corporations on social media marketing and engagement strategies for over ten years. 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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