Facebook makes money from advertising. Estimates shows that advertisement gives Facebook most of its revenues. For instance Facebook accrued 95 percent of its revenues from advertising in 2009 and 85 percent of revenue in 2011 also came from advertising. The advertisers have the opportunities to target and segment the users based on their demographic details through the use of Facebook advertisement platform. The Facebook users are required to upload their authentic identity online, and the information disclosed to Facebook becomes the organization’s property. The firm used extensive, a proprietary database to map the connections between the users and their friend then recorded the services and products they had liked. The advertisers can utilize the database to target customized products and services based on connection and preferences of users. It is believed that consumers will receive advertisement better when social context is used.
The second source of revenue for Facebook is the sales of virtual goods. Examples of the virtual goods are the social games. Sales are facilitated through Zynga an online gaming company. Consumers purchased virtual goods with a net worth of $9 billion in 2011. The forecast indicated that by revenue generated by Facebook will be $14 billion in 2016. The third source of revenue for Facebook is based on the geographical locations of data centers. For instance, United States accounted for 56 percent of revenue in 2011.
There are two aspects of services and products Facebook owns, directional advertising platform designed for the advertising firm and social network service for the common users. Social context is the Facebook’s core value driver for advertising firms. The Facebook’s social network service provides the excellent user experience. The clean and simple user interface is widely accepted, and Facebook generates the rapid website using its powerful server.
Why is Facebook going public? What is the planned use of proceeds from the offering?
Facebook is going public due to various reasons. First, Facebook is going public due to the objective situation. The outdated 1964 Security and exchange commission rule requires any private company whose number of shareholders exceeds 500 to adhere to certain financial disclosure such as filing of financial reports the same way as public companies. Therefore, the requirement to publicly avail financial details is triggered as the firm’s shareholders tend to exceed 500. Secondly, Facebook considers going public enable raising funds from a large number of investors it will have. The firm will have enough monetary resources to invest in the business and develop new products hence making the company more competitive. Also, the shareholders will have the opportunity to gain a good value for their stake in the long run. Finally, the move will assist in further development. It will amplify the brand value and raise reputation. More users become attracted to Facebook due to awareness created, and market share expands as well. The proceeds gained will be used for general corporate purposes and working capital.
Test the sensitivity of the DCF analysis in Exhibit 11 to the assumptions on sales growth and EBIT margins. What are the challenges in using multiples analysis (Exhibit 12) to value Facebook?
McNeil’s team relied on the use of market multiples from the recent transaction and comparable firm and the discounted cash fellow (DCF) analysis as the primary approach value companies. The DCF analysis is sensitive to the assumptions used. Application in a fast-growing company is difficult since their value is tied up in intangibles and patents. Prof Damodaran argues that Facebook had the opportunity of dominating its market basing on his DCF analysis. However, there are two caveats. First, considering Zuckerberg’s controlling stakes in the organization, other shareholders will have minimal contributions to the strategic choices. Secondly, the phenomenal success of Facebook is expected at $75 billion valuations with anything less considered a failure. The market multiple analysis consists of publicly traded companies such as mobile phone manufacturers, online retailers, and social networking companies. Since the use market multiple is part science and part art, it is significant to identify the right set of ratios and the right set of comparable.
As a potential shareholder, what are your concerns about Facebook or its stock offering? What is your final recommendation for the CXTechnology Fund?
First, Mark Zuckerberg controls Facebook since he owns 56 percent of the votes. It means he is the decision maker for the company. The shareholders or low-level managers adhere to all decision implemented by the top manager because the organizational structure is centralized. Any slight mistake could lead to high loses since one person implements all the decision. Innovation is an integral aspect of any company dealing with technology. Secondly, sustaining creativity in Facebook is hard since it is a social network company. Therefore, investing in Facebook is worrying. Also, class A of shares is the only one available at IPO, but class B are unlisted. Lastly, Facebook users have increased since 2004. Facebook should strive to maintain a large number of users to keep attracting advertisement companies. Failure to maintain the users, the generated revenue will reduce. Moreover, Facebook faces stiff competition from LinkedIn, Twitter, Google+, and MySpace. As an investor comparison of the different Social network, space is an important aspect of investing.
The CXTechnology Fund is a practical aspect of investment. First, Facebook is less sold compared to buying due to the enthusiasm of the public for the Facebook IPO. Therefore, an increase in stock price is reported within a short period. Thus it is a favorable opportunity for the short-time investors. Secondly, since the IPO open price is above the intrinsic value of Facebook, the trend suggests that when the enthusiasm of the public also reduces the stock price of Facebook will drop. Hence the CXTechnology Fund should be used to purchase stock during cool down of the price. Thirdly, the decision on whether to buy or sell stocks relies on the ability to analyze the future trends. The analysis of the stock price is carried out by the CXTechnology Fund. Lastly, overbuying of the stock is not a wise decision. Other stocks of the company are added to the Facebook investment portfolio by CXTechnology to disperse the risk.
Mark, K. (2018). Facebook, INC: The Initial Public Offering. Ivey Publishing.