Behind Facebook's face value

SmartCompany

The Facebook news will be flying thick and fast in the coming weeks, after the leak on the weekend that the company will file for an IPO in the coming week and is likely to file in April and May.

The figures being bandied about are frankly staggering – according to reports, the company will try to raise $US10 billion and float with a market capitalisation of $US100 billion.

Now, there are lots of different ways that we'll look at this unfolding story over the coming weeks and months. This float will:

– Confirm the existence of a group of fabulously wealthy 30-somethings led by founder Mark Zuckerberg;
– Shine a light on a small army of millionaire employees;
– Create tensions around the delicate balance of long-term and short-term strategies within the company; and
– Raise questions as to how Facebook will spend its $US10 billion haul.

Presumably some of these issues will be addressed when the company makes its IPO filing and reveals for the first time, in detail, who owns what.

But while we wait, the big question to ponder is this: How will Facebook live up to a valuation of $US100 billion?

As many commentators have pointed out, that will instantly put the company among the giants of the tech world. Apple has a market capitalisation of over $US400 billion, but Google's market cap is $US188 billion – still well above that of Facebook, but not completely in a different realm.

But Google is of course a much more established business, with a proven track record of monetising its products and services. It generates $US38 billion in annual revenue, and posted an operating profit of $US12 billion.

Facebook's numbers are much smaller. According to figures supposedly "leaked" to CNBC on the weekend, Facebook had operating revenue of about $US3.8 billion in 2011 and operating profit of $US1.5 billion.

Those figures aren't bad – indeed, the margin is pretty impressive – but what analysts and potential investors need to know is whether they are enough to justify a price tag of $US100 billion.

Facebook is clearly a growth story, so investors may be prepared to allow the company to "grow" into its valuation.

But they will want to see proof that Zuckerberg and his management team have plans to increase the monetisation of the platform and add alternative revenue streams.

Can the company use the vast amounts of data it has collected on users to offer even more potent advertising than Google does?

What other services – music, movies and other forms of content – can hang off the Facebook platform? Can Facebook get a slice of the revenue generated by this content, other than by selling ads around it?

Will Facebook be able to add new arms to its business, as Google has done by buying YouTube and adding products such as Google Docs?

Can Facebook crack emerging markets as effectively as it has taken English-speaking ones?

Can Facebook continue to be a daily utility in the lives of users, as Google is? Can the business still thrive if the rate of member growth was to slow, or time spent on the site was to drop?

These are questions that Zuckerberg and his team would have been considering for years. But they've been doing so in private – once the company floats, investors will expect answers and results every quarter.

Justifying that valuation is going to be an incredible job. As Twitter rookie Rupert Murdoch said on the weekend: "Facebook's a brilliant achievement, but $US75-$US100 billion? Would make Apple look really cheap."

Then again, he's the guy who bought MySpace for $US580 million and sold it for $US35 million. Zuckerberg would surely love to prove him wrong.

This article first appeared on SmartCompany on January 30. Reproduced with permission.