Mark Zuckerberg’s plans for the public floatation of Facebook came a step closer this week, after the social networking behemoth announced record profits for the year.
Facebook has doubled its profits over the last 12 months and is now on course to hit the $1 billion mark less than 8 years after its launch. Operating earnings soared to $714 million in the first nine months of 2011. These figures, which were leaked to an American technology blog, would suggest that Facebook is in fact making more money than it expected from its base of 800 million users. Zuckerberg will no doubt be bolstered by these figures, and will aim to float the company as soon as practical. It had been envisioned that Facebook would launch to the public as early as the second quarter of 2012, but industry experts are predicting that it may yet be brought forward.
When it does eventually go public, Facebook is expected to raise around £10 billion in a stock offering that would value the company at £100 billion.
However, these experts are also adding a note of caution to proceedings as they have seen signs that investor’s appetites for young and unproven technology companies is starting to loose some of its appeal. They point for evidence to the first day ‘failure’ of online games developer Zynga. The company, which is responsible for Farmville and the Mafia Wars franchises, scooped up $1 billion in what was the largest technology offering since Google in 2004. However, its $7 billion valuation was considerably less than had been envisioned: the company had been expecting 3 times that amount earlier in the year. What’s more, Zynga shares dropped by almost 5% on the first day of trading, in stark contrast to the general feeding frenzy that usually accompanies technology floats.
So what’s the problem with this sort of floatation?
Why are investors backtracking and looking for safer havens? Well, according to David Menlow, a spokesman for research group, IPO Financial, it’s all a question of confidence: “investors are a bit twitchy about these self-imposed high valuations.” If that wasn’t bas enough, some analysts are warning that shares in Zynga will continue to fall further, in spite of the fact that the games developer made a profit of £31 million in the first nine months of the year. The shares will continue to drop because growth may be slowing.
There are also concerns about Zynga’s almost total reliance on the Facebook platform. The social networking site accounts for almost 90% of its revenues. Whilst this is great news for Facebook, it’s not that good for Zynga and other similar companies. Any company that piggybacks on the world’s largest social media network has to give up 30% of the total sales it generates on Facebook. This ability to dictate terms has generated a massive amount of cash at Facebook. According to information obtained from Gawker, the online media network, Facebook had amassed a total war chest of £3.5 billion by the end of September. For the purposes of comparison, it took eBay almost twice as long to build its £4 billion cash reserve. Zuckerberg, who owns a quarter of the stock, is sitting pretty, and is in line for an estimated $23 billion windfall from the impending floatation. Other employees won’t fare anything like as well, but are sitting on stock of around $30 billion none the less.