Last week Facebook, which has an expected value of about $80 to $100 billion, revealed plans to raise $5 billion (£3.16 billion) through an IPO in what is likely to be the largest sale of stock by an internet company since Google.
The company which generated $3.7 billion in revenues last year – up 88% on 2010, with net income increasing by 65% to $1 billion in the same period.
Sebastian Radcliffe, the manager of the £335m Jupiter North American Income fund, raises concerns over the company’s three-year outlook.
Facebook claims to have 845m monthly users, an annual increase of 39%, but Radcliffe questions whether this is sustainable. “As Facebook begins to monetise its user base, there is little information one can gauge the extent to which this threatens to alienate core users,” he says.
The manager is also concerned the company has stretched valuations. “The valuation allows no margin for error – trading at a double digit multiple of forward sales,” he adds.
With Mark Zuckerberg, the chief executive and co-founder, retaining 57% of the company, Radcliffe also questions the company’s corporate governance.
“The corporate structure allows the founder to wield absolute control at the expense of shareholders through a dual class equity structure,” he says. (article continues below)
Ian Warmerdam, the co-manager of the £344m Henderson Global Technology fund says although Facebook is an exciting growth prospect, it is too early to form an investment opinion.
“It is only when the more prosaic aspects of profit and loss and balance sheet analysis are able to be properly considered in relation to market value that any genuine investment decision can be made,” Warmerdam says.
However Philip Pearson, the co-manager of the £96m GLG Technology Equity fund argues Facebook looks significantly undervalued in terms of its advertising potential and says he will participate in the IPO.
“The debate about the value of Facebook tends to focus on short-term user trends, revenues and earnings but fails to spot the key attraction,” Pearson says.
“To an advertiser, the price you pay “per eyeball” on Facebook is roughly one tenth the price you pay for that eyeball on TV ads. As this price gap collapses, we should see dramatic growth in Facebook’s revenue and much of this will drop through to the bottom line.”