Sorry, Facebook haters: It's not going anywhere

Facebook’s IPO caused a divisive reaction from individuals in the tech community. Unfortunately for the company’s detractors, it’s not going anywhere for quite a while. Its stock debuted Friday at $38, making Facebook the highest-valued American company ever at the time of an IPO, with a market capitalization of $104.18 billion.

Things got tumultuous after that, with the stock going as high as $45 before settling back down at $38.23 at the end of regular trading. It’s not exactly clear what led investors to bolt so quick, but part of the crazy trading day may have to do with the sheer amount of Facebook stock provided to the public. Roughly 20 percent of Facebook’s stock was made public; Google, by comparison, only offered about seven percent of its company at its IPO.

Yet for all the company’s success, there’s still a vocal group which claims both the company and its stock are “all hype.” What these people are ignoring is the fact that Facebook’s valuation is actually in line with what Google was valued during its initial stock offering relative to its revenues and profits at the time.

The recent financial history of dot-com IPOs

When looking over the financial information of recent IPOs for Internet companies, it’s perplexing why anyone would think Facebook’s stock would be considered “risky” for the short-term.

One of the most popular views about Facebook on technology sites – Neowin included – is that Facebook’s stock will usher in another dot-com bubble burst, similar to the bubble that burst in 2000 and caused a collapse of the stock market. Yet of all the recent Internet companies to begin issuing stock over the past few years, Facebook’s business model and financial situation are by far the most sound. If there is another dot-com bubble in the near-future, it will have nothing to do with Facebook and everything to do with other recent IPOs.

Groupon launched its IPO in April and garnered a market valuation of $11.2 billion, despite having never posted a profit. In fact, the company just revealed its first profitable quarter ever earlier this week, where it posted a mere profit of $16.3 million. Groupon’s business model – or lack thereof – was roundly criticized before its IPO, yet it still had one of the largest IPOs, and one of the largest valuations, in recent years.

Zynga, which launched its IPO in December, has business model more sound than Groupon’s, but at the same time the company relies heavily on Facebook’s success for its own. While Zynga recently launched its own gaming portal, the overwhelming majority of its users still come from Facebook. Despite this unheard of reliance on another company, Zynga’s market capitalization was roughly valued at $7 billion.

Unlike these companies, Facebook has multiple revenue streams. The majority of the company’s revenue comes from advertisements – the company is the largest Internet display advertiser in the world – but it also takes a cut of Zynga’s profit, as well as other companies which tie into Facebook. Additionally, Facebook’s actively seeking new revenue sources, unlike Zynga and Groupon, which have largely been standing pat.

Facebook’s recently revealed plans to expand its revenue stream to new, potentially lucrative markets. Earlier this month, the company announced its new app center, which will provide users with purchasable apps – yet another revenue stream for the company, albeit one that will probably take a while to fully monetize. Facebook’s mobile apps will also soon be monetized, ensuring that Facebook will increase its revenue yet again. This is significant as more and more users are primarily using mobile devices to access Facebook and other social media outlets.

Misleading charts have also attempted to pit Facebook against Google in terms of success prior to their respective IPOs. A key piece of information missing from these discussions is that Facebook showed no real interest in monetizing its platform for the majority of its early years. It wasn’t until after Sheryl Sandberg joined the company as chief operating officer in 2008 that it had a legitimate business strategy. Its advertising platform was released later that year, and it took less than two years for the company to become profitable. Since then, its profits have skyrocketed.

When Google filed for its IPO, the company had a $961.8 million in revenues and $105.6 million in profits for the previous year. Facebook, by comparison, posted revenues of $3.71 billion and a profit of $1 billion for 2011, the year prior to its IPO. Google’s market valuation upon its IPO was $23 billion, while Facebook’s IPO gave it a market capitalization of $104 billion. Given the company’s annual profit compared to Google’s at the time of each company’s IPO, this seems a reasonable valuation. So, for all the cries of Facebook being massive overvalued: history disagrees.

Others have pointed to the fact that companies with a similar market capitalization have far higher profits. Well, yes. That’s entirely how the stock market works: historical patterns have shown what a company is worth, so eventually that company will settle at its true value. Facebook is a relatively new company that is still growing and has the potential to eventually be an advertising juggernaut. Its IPO is more about potential than current value, like most IPOs.

Why advertising on Facebook will be a massive success... eventually

Much has been made of General Motors’s recent decision to stop advertising on Facebook. But was the company even advertising in a strategic manner, or was it just throwing crap at the wall and hoping it would stick? People who actually run Facebook marketing campaigns say it’s the latter. One advertiser even classified GM’s advertising campaign on Facebook as “mental,” as the company wasn’t even attempting to interact with Facebook users. 

Traditional marketing practices can’t simply be applied to a new platform – expecting to see results by doing what works on other platforms is, in fact, mental. With the advent of every new media platform, companies slowly begin to learn what works and what doesn’t. Going all-in and refusing to learn a platform is never successful, as GM’s just proven. Facebook already has a large amount of information on its users, information that users willingly share. Companies have to harness this data by using Facebook to continue information sharing and social gathering – the entire purpose of social media. Simply posting ads about having a sale serves no purpose, given how Facebook is used. Instead, companies have to create discussion through their advertisements.

General Motors doesn’t merely have social media problems, however. The company also announced it would stop airing commercials during the Super Bowl, indicating advertising problems beyond Facebook. Ford, one of GM’s primary competitors, took to Twitter to chastise GM, saying the company simply didn’t know how to advertise on social media. The company said that, unlike GM, it is placing a heavy emphasis on social media platforms.

Pages on Facebook are already a hot marketing and public relations tool. A smart company will actively gather information about what its customers like or dislike based on what users have said on the company’s brand page(s), then use that information in social media advertisements. General Motors didn’t do this, which illustrates that the company doesn’t know how to advertise on social media platforms.

Social media advertising is not a replacement for traditional advertising, just as advertising on Google is not a replacement for traditional advertising. Instead, both forms of advertising serve to complement traditional advertising. With Google, companies can advertise to someone looking for information regarding your product or service; with Facebook, companies can advertise to someone who has already expressed interest in a particular product or service (or related products or services).

All of this doesn’t mean Facebook’s advertising methodology is perfect. It’s not. The company needs a more integrated experience – something that works better with how people use Facebook. Display ads probably aren’t going to be the future of advertising on the platform, but for now they serve a decent purpose. More natural advertising has to exist, and given Facebook’s history, it’s reasonable to assume the company will continue working on advertising methods.

The fallacy of the MySpace 2.0 argument

The primary argument against Facebook is that it will be the next MySpace – a social media empire that quickly falls from grace when a real competitor emerges. But the only similarities the two have as a business is the fact each has been the top social networking site at one point in time. MySpace was sold to Rupert Murdoch’s News Corporation, a company that had no idea what to do with MySpace and never added any new features to the site. Facebook, conversely, is run by its founder (who doesn’t appear to be leaving anytime soon) and constantly receives new features and updates.

Facebook has over 901 million active users. Put simply, roughly one person for every seven-to-eight people on the planet is actively using Facebook. In the United States, the numbers are even more daunting: over 40 percent of the population of the U.S. is estimated to have a Facebook account. No other company on the planet can make a similar claim. MySpace, at its peak, had 75.9 million active users. So don’t count on Facebook suddenly crumbling.

The most recent competitor to Facebook, Google+, has a sparse active user base, according to a recent study. Google boasts that its social media site has over 170 million total users (the company has refused to release data regarding how many active users it has), but the study claims that a large percentage of users don’t continue to use the social network after their first engagement. Of a random sample of 40,000 public users, 30 percent of users who made a public post never made another, according to the study.

Even ignoring the statistical data, users have very little reason to switch to Google+. The site has proven to be creatively bankrupt, providing almost no features that aren’t already offered by Facebook, Twitter or another social media site. Without a reason to switch to Google+, Facebook users are unlikely to join the new platform and abandon their friends on Facebook.

Ironically, the quickest way to gain users on a social networking startup is to use Facebook’s open graph, as Pinterest recently proved. The site recently became the third-largest social network on the Internet, surpassing Google+. This was largely due to the fact that users could interact with the site through their Facebook account. Other companies have also found immediate success through Facebook’s open graph, such as Spotify.

If Facebook is going to be overtaken, it’s going to be by an upstart that is willing to take risks, willing to innovate and unwilling to sell itself. Mark Zuckerberg and company grew Facebook to the site it is today through an unwillingness to compromise goals for a quick cash-in. Since then, the Facebook has continued to add features to the site at a seemingly impossible rate, given the current size of the company.

The future of Facebook

Will Facebook be a success ten years from now? That’s hard to say, given the volatility of Internet businesses. But it seems the company will thrive for another year or two, at minimum. An active user base of 901 million doesn’t just erode overnight, after all.

As a company, Facebook is more ready than Google was at the time of its IPO. When Google filed for its IPO in 2003, the only major revenue stream it had was advertisements. Facebook has already diversified its revenue streams, giving it an advantage Google didn’t have. For the near-future, Facebook’s stock is likely to remain relatively flat, barring any unforeseen events, such as Zuckerberg leaving the company or a market collapse. 

The possibility that Facebook’s value will plummet somewhere down the line is a very real one. If the company doesn’t continue to advance its advertising methods and can’t find a good way to advertise to mobile users, then yes, it will fail in time. But Facebook’s already proven its intent to innovate and find additional sources of revenue. The company’s size has bought it another year or two – it’s a platform that reaches a large amount of people, something that will always be important to advertisers.

As a social network, Facebook continues to innovate and avoid the mistakes that cost MySpace its supremacy. It hasn’t overrun the site with ads, it hasn’t been complacent with its position in the industry and its founder has remained hands-on and continued the site’s expansion into relevant areas.

It doesn’t matter whether you like or dislike Facebook. The company has proven itself to be both a business that should be taken seriously and a social media network that won’t go down without a fight.

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