In mid-May 2012, the pricing of Facebook Inc.'s initial public offering (IPO) was undertaken. A CXTechnology Fund analyst looked forward to speaking with the lead underwriter about his interest after a review of Facebook Inc's phenomenal growth as well as its potential for profit as a business and with the competitive environment of the social networking. The analyst had to come up with the decision whether to subscribe to shares in the IPO or not, considering that the IPO appeared to be oversubscribed with heavy interest, and the valuation seeming to be much more.
Deborah Compeau; Craig Dunbar; Michael R King; Ken Mark
Harvard Business Review (W12453-PDF-ENG)
January 25, 2013
Case questions answered:
- How does Facebook Inc. make money? What are the value drivers of its business? What is its comparative advantage relative to other social networking companies?
- Why is Facebook going public? What is the planned use of proceeds from the offering?
- What was going on in the U.S. IPO markets prior to Facebook’s offering? What has been the performance of recent IPOs?
- What is the intrinsic value of a Facebook share? How does the valuation compare to the price talk from the underwriter?
- As a potential shareholder, what are your concerns about Facebook or its stock offering?
- What is your recommendation for the CXT Technology Fund?
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Case answers for Facebook, Inc.: The Initial Public Offering
How does Facebook Inc. make money? What are the value drivers of its business? What is its comparative advantage relative to other social networking companies?
Facebook Inc. makes money by providing a platform for advertisers to reach their target customers. Facebook user’s personal information and preferences are collected by Facebook through their activity with the platform making facebook’s advertising platform markedly more effective than others. Advertising products and services accounted for 98% of Facebook’s revenues in 2009, 95% in 2010, and 85% in 2011.
Facebook also has made significant amounts of revenue from its payment business, which comes exclusively from the sale of virtual goods or games like with the online gaming company, Zynga. When transactions are made between users and the gaming company, fees are charged by Facebook as a part of its revenue.
Facebook Inc.’s consumer-facing product is highly engaging. To be social in the 21st century, it is a must to be on the Facebook network. Facebook’s high level of consumer engagement makes its product offering sticky.
Since most user’s social network uses Facebook, there are strong network effects. Facebook has built an advertising platform that monetizes their engaged users. Unlike other advertising platforms, Facebook has built ad targeting technologies that make users more apt to engage with its ads since they have such an adept understanding of its users.
Other advertising technology providers have similar tools to target users. However, Facebook leads in the fact that they have built a user experience that allows them to understand users more than any other advertising tech company, resulting in the most effective digital advertising platform in existence.
Why is Facebook going public? What is the planned use of proceeds from the offering?
The purpose of the IPO was to create an exit opportunity for existing investors securities, raise additional capital, and to enable Facebook Inc. to access markets in the future. The money that was raised from the IPO was used for…