Yesterday afternoon, Facebook filed its S-1 prospectus, the document that formally registers it with the securities and exchange commission and locks it into a ride to an Initial Public Offering (IPO).
The S-1 filing contains a wealth of previously undisclosed information about the social networking behemoth, including its capitalization, user statistics, risk factors and more.
Facebook seeks to raise $5 billion in its IPO. This will make Facebook the biggest tech IPO in history, followed by Google, which raised $1.7 billion, and Groupon, which raised $700 million.
According to the S-1 filing, Facebook recorded revenues of $3.7 billion, operating income of $1.75 billion, and net income of $1 billion in 2011. The IPO filing did not disclose the share price, but according to a Facebook estimate, as of December 31 the shares were $29.73 apiece.
Comparing these numbers to Groupon, which debuted in November, Facebook’s revenue and income look good. Groupon’s S-1 filing revealed a net loss of $420 million over the year leading up to the IPO, $117 million of which occurred in the quarter just before its IPO filing–yet the company raised $700 million.
According to the filing, as of December 2011 Facebook had 845 million monthly users , 483 million daily active users, and 100 billion friend connections, making it the biggest online community by a landslide. This gives the company many advantages to tap revenue streams such as its online currency and advertising, the latter being the stream which generates a strong majority of Facebook’s income.
Yet the initial public offering presents a number of unique risks for Facebook.
For one, tech IPOs have been weak of late. Two recent high-profile IPOs, Groupon and Zynga, both sunk below their initial share prices. This signals a market skewed by secondary, pre-IPO markets, which allow qualified investors to put money in companies before they go to public markets. This being the case, Facebook’s valuation could be inflated before it even hits the markets, raising the strong possibility that it does the same thing as its recent forbears.
In addition, the S-1 filing introduced a number of risk factors, the most important of which is the shift to mobile.
The company is heavily dependent on third-party ads placed on the site. In 2009, 2010, and 2011, 98 percent, 95 percent, and 85 percent, respectively, of its revenue came from third-party ads. But the S-1 expressed concern about the current shift in Internet consumers from desktop screens to mobile screens. Facebook does not put ads on its mobile offerings, prompting it to mention the following:
“Engagement with Facebook through our mobile products, where we do not currently directly generate meaningful revenue, particularly to the extent that mobile engagement is substituted for engagement with Facebook on personal computers where we monetize usage by displaying ads and other commercial content [presents a risk].”
Related to this concern is the fact that Facebook’s existence on mobile screens is tethered to operating systems and companies which it has no control over, like Google’s Android and Apple’s iOS.
With the rapidly accelerating shift to mobile, Facebook has a driving concern to figure out a way to monetize its mobile products. Though it could advertise on its apps, all revenues would be shared with Google and Apple, two potential competitors.
And considering the shift to mobile, Facebook’s other revenue generator, social gaming, provides as much a threat as it does an opportunity.
The social gaming company Zynga accounts for 12 percent of Facebook’s revenue. Zynga’s contributions are “comprised of revenue derived from payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga’s apps generate a significant number of pages on which we display ads from other advertisers,” according to the filing.
But Facebook acknowledges that if Zynga were to begin developing games for other platforms, or if social gamers began to migrate to other platforms, much of Facebook’s revenue would fall away.
Zuckerberg, who will become CEO and control 57 percent of the company, will look for a way to make Facebook relevant on mobile. Thought it’s loathe to do so, the company may consider creating its own mobile operating system or some sort of strategic partnership with a company like Microsoft. Such moves would allow it to control its own destiny.