Will Facebook Milestone Hasten An IPO? [IBD]
* Brian Deagon
* On Thursday September 17, 2009, 7:45 pm EDT
Talk of a Facebook stock offering gained new currency this week when CEO Mark Zuckerberg declared the social network cash-flow positive, a milestone that comes several months ahead of schedule.
On the firm's Web site, Zuckerberg said Facebook turned cash-flow positive in the second quarter, meaning it is generating enough cash to cover daily expenses. Facebook didn't expect to be cash-flow positive until "sometime in 2010," Zuckerberg wrote.
While company officials stress that no IPO is in the works, the cash-flow feat suggests that the popular site is managing costs well and that revenue is flowing in faster -- two factors sure to appeal to investors eager to see the site turn its popularity into a sustainable business.
"If everything falls into place, it will bring investors back into the tech markets," said David Menlow, president of IPO Financial Network. "It will significantly foster more venture capital money into new ideas that have yet to be launched. I expect investors will focus more attention on Internet technology markets once again."
A Facebook IPO is bound to be the most hyped offering since Google's whopper in August 2004, which raised $1.67 billion. It could also rekindle interest in tech IPOs and pump money back into the sector.
The tech industry could use a shot in the arm. Investments by venture capital firms hit a 13-year low of $3.7 billion in the second quarter. Likewise, the IPO market is in its longest lull in a decade.
At the Reuters Global Technology Summit last May, Zuckerberg said Facebook was in no rush to go public. Facebook spokesman Larry Yu reaffirmed that the firm has "no current plans for an IPO."
"The business is performing well, which allowed us to achieve our cash flow positive milestone earlier than projected," Yu said via e-mail.
Facebook board member Marc Andreessen in July told Reuters he expects the social-network site to generate sales of $500 million this year. Yu would not confirm that.
Justin Smith, editor of the Web site Inside Facebook, said Facebook is likely to book revenue between $500 million and $550 million this year.
"Things are going well on multiple fronts," he said. "Facebook is in a unique position with a unique degree of product insight and strategy that has allowed them to grow at an unprecedented pace."
The bulk of Facebook revenue is advertising. The rest, about $70 million this year, will be micropayments for virtual goods -- inexpensive "gift" icons such as flowers and teddy bears that people post to friends' Facebook pages. Facebook is adding icons for game playing.
"They're really expanding this business," Smith said.
Zuckerberg launched Facebook with three other co-founders in their Harvard University dorm room in 2004. It now has 300 million users, up from 175 million in February and has received more than $600 million in funding.
The figure includes a $240 million investment by Microsoft in 2007.
In May, Digital Sky Technologies, a Russian investment group, invested $200 million in Facebook for a 1.96% stake of "preferred" stock, which Facebook said placed a $10 billion valuation on the company.
U.S. financial markets have yet to launch a successful IPO in social networking. The closest they came was the planned IPO of United Online (NasdaqGS:UNTD - News) unit Classmates.com, which was canceled in December 2007.
"There hasn't been a clear, compelling business model for these (social networking sites) yet," said Benjamin Schachter, an analyst with Broadpoint 13Tech.
Facebook could fall by the wayside like so many others, he said. But with more than 300 million users and 20% growth in new users since July, that seems unlikely.
"It's an incredibly unique entity. We haven't seen growth like this in a long time," Schachter said.
When the time does come for a public offering, Facebook will need to look rock-solid, said Linda Killian, portfolio manager of Renaissance Capital's IPO Plus Fund .
"Investors aren't drinking Kool-Aid anymore," she said. "They will be looking real hard at the business model." |
