Facebook IPO: Risk Factors and growth

Facebook IPO: Risk Factors and growth

Summary: Facebook's IPO filing with the SEC warns potential investors of the chance that the value of their investment may go down as well as up. This post looks at growth and why you might think twice about investing.

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Facebook's filing with the SEC makes for depressing reading if you study the risk factors section. Obviously it needs to warn potential investors of the chance that the value of their investment may go down as well as up.

Here are some of the 35 initial risks from the filing. This post focuses on growth and why you might want to think twice about investing in stock:

1.      If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results, and business may be significantly harmed.

3.    Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results.

4.    Facebook user growth and engagement on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that we do not control.

5.    We may not be successful in our efforts to grow and further monetize the Facebook Platform.

16.    We expect our rates of growth will decline in the future.

30.    We cannot assure you that we will effectively manage our growth.

Six risk factors from Facebook's initial list of 35 is a large percentage of the total in the filing. As an investor you want to see your stock value grow. 17 per cent of the risks stated in the filing focus on one thing. Growth.

Facebook is concerned about not being able to grow as much as its investors want it to.

Facebook needs to be able to continue to add new users to grow. With an existing user base of almost 1 billion it will struggle to do so.  It is almost at user saturation levels world wide.

Failing to keep its existing users engaged will lead to a decline in activity and numbers.

There are 488 million monthly active users that access the service from their mobile devices. Currently there is no way to monetise the mobile experience whilst maintaining an effective experience for mobile users. Sponsored stories, which appear in the users' feeds might bring in limited revenue.

Facebook is also dependent on the mobile operator building a system that is compatible with Facebook. If the mobile operator does not use HTML5, then Facebook will have to develop its app for each mobile OS and ensure that it works.

Facebook has been struggling to encourage advertisers to stay with Facebook. Many stores have been failing at their f-commerce goals. Only yesterday General Motors announced that it was no longer going to spend money on advertising on Facebook.

Although Facebook has tried to maximise its opportunity for revenue, it has found that users turn away from the app. It has tried to provide a balance between advertising and user experience, however app developers might prefer to generate revenue from the ads.

Facebook expects its rate of growth to decline. This is to be expected. As a growing company Facebook experienced a growth in revenue of 154 per cent from 2009 to 2010 and 88 per cent from 2010 to 2011. As it achieves market penetration, revenue growth will continue to fall.

As Facebook increases in size and market dominance, then the size of the company will also increase. Cash is needed for headcount, operating expenses, hardware infrastructure and capital assets. If Facebook grows, so does its fixed and variable costs.

Facebook will become a big company with the associated challenges that brings. Microsoft went through this organisational maturity and change, as has Google. Now it is Facebook's turn.

So should you invest?  Zynga's shares slumped by 10 per cent after trading for one day.  It filed for $1 billion IPO in 2011.

Will Facebook follow suit and slump too -- or will the risk factors about growth or lack of it -- be enough to discourage investors from spending their cash?

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Topics: Banking, Social Enterprise

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  • No tangible assets

    Other than some server hardware and a few buildings, Facebook's only assets are its 900 million purported "users". It sells advertising. There are other online social services and it takes less time to change to another one than it does to change your cable/satellite TV services. Users are moving to Mobile, for mobility, but also to escape the heavy advertisement load. Advertisers are seeing clicks not adding up to sales as quickly with late joiners, as with the earlier neophiles. Remember MySpace? These things come and go. Why do you think the original investors want to cash out part of their stock now? They have as much info as anyone - did they suddenly decide they were "rich enough". I don't think so. When buying a "pig in a poke", the size of the poke is not the major consideration.
    mistercatworks@...