Investing in Facebook’s IPO

 
on February 07 2012 9:44 AM
Facebook
Facebook appears to be gearing up for the launch of new premium ads according to documents that surfaced late last week. The documents reveal that the new Facebook advertisements will be social in that they'll reveal who has liked an advertiser. The ads will pull content from a brand's Facebook Page, rather than requiring separate copy to be written. Facebook

width=280Facebook officially filed for their IPO last week with an expected offering to take place in May. At that time, Facebook will be valued somewhere between $75 billion to $100 billion. Also announced were the company's 2011 financials, showing $3.7 billion in revenue. As strong as this figure looks at first, investors should look further into key data to see how Facebook generates so much of their revenue.

It is reported that Facebook generated 85 percent of overall revenue from advertising. We see this each time we log on to Facebook, targeted ads that are Facebook's version of a pay per click campaign. It seems high-risk to invest in a company that is largely one-dimensional with respect to revenue streams.

Right now, there is tremendous optimism for their first day of trading; it would surprise no one if their stock soared (as LinkedIn did). However, as much as Facebook is expected to charge out of the gates, investors should be concerned about investing in Facebook long-term. Expect heavy emotional investing initially, to be taken over by fundamental investing.

Figures, (courtesy of eMarketer) indicate Facebook's ad sales grew 104 percent in 2011. That figure, however, is only expected to climb 58 percent in 2012, and 21 percent in 2013. The trend is diminishing which indicates their dependence on ad-revenue could be fading. Facebook was originally developed to be a status update platform, not a search engine hosting PPC campaigns. Furthermore, when we look at Facebook's CPM (cost per thousand impressions) we see that they are earning a mere 22 cents while the industry average is around 50 cents and rival Google is earning $2 - $4.

Prior to their IPO, Facebook should invest their resources in to improving CPM and convincing consumers that increasing brand awareness is generating return on investment (versus soaring CPM margins). Focus on these two areas can help the company improve their positioning and continue to attract attention from marketers and advertisers.

About the Author: Kenneth C. Wisnefski is founder and CEO of WebiMax, a leading online marketing firm specializing in search engine optimization, search engine marketing, pay per click management, and social media marketing. Wisnefski is an expert in online advertising and a serial web Entrepreneur on his third successful startup.

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