Facebook and its IPO have transcended conventional definition.
The closest comparable tech initial public offering was Google's (GOOG), in August of 2004. The internet-search giant raised about $1.7 billion, putting the implied market capitalization of the company at roughly $23 billion.
Facebook intends to raise roughly $10 billion, which will give a pre-open market cap of somewhere around $110 billion. Facebook will probably be worth about $120b by the close of trading the first day it's public.
When Facebook filed an update of its S-1 last night it gave investors one last look at the company prior to its debut. On day one traders can do what they will. In the long-run, Facebook will have to justify its giddy pre-public value. The only way to do so will be through growth.
In the attached clip my Breakout co-host Matt Nesto and I run through the details of the updated filing and talk about ways to measure the company's progress on the road to global domination.
Advertising and User Experience
As Nesto observes, Facebook needs to modify the user experience to build more revenues. With over 900,000,000 monthly users, Facebook's days of double-digit growth, quarter after quarter, are in the past. What the company needs to prove now is that it can more effectively monetize the users it has.
So far the company hasn't cracked the code.
Total revenues come in at $1.06 billion, up 45% year-over-year, but down compared to the $1.3 billion booked in Q4. Advertising accounted for nearly all of the 18% sequential drop.
Advertising is seasonal, but Facebook should be growing too fast for seasons to matter. Look for more ads and the impact that has on user "stickiness" as a proxy for Facebook growth. Suffice it to say, the company needs to pick up the pace.
Last year Facebook spent somewhere in the neighborhood of $70 million on acquisitions. In the last month or so the company has laid out a reported $1 billion (actually about $1.4 billion) for Instagram and purchased patents from Microsoft (MSFT) for another $550 million.
Given the weakness in ad sale growth, the acquisitions suggest a certain level of groping as Facebook tries to find its next act. In part, this is going to come from payments, such as the money users lay out for extras while playing Zynga's (ZNGA) Farmville.
Payments were 18% of Facebook's total revenue in the first quarter, accounting for about $288 million. The higher the acquisition price, the safer it is to infer Facebook isn't able to create baby Instagrams on its own.
Even with a richly-valued stock, Facebook isn't going to make shareholders money by dropping $1 for every cool new application it can find.
The One Measure: User Addiction
For Facebook to sell high-priced ads and generate payments, it needs users to stay on the site for as long as possible and to visit as often as possible. To that end, Facebook measures users in two ways. The first is monthly users, or people who show up only periodically to check email or find out when their high school reunion is.
Those users are worth very little.
The second type of Facebook users are those who show up every day. Those are the folks who are going to spend money on Farmville cows and buy the products advertised on Facebook.
In the last quarter, Facebook had 901 million total users. Of these, 526 million, or 58%, used the site daily. The same measure was 57% for Q4 and 55% for last year.
Without much potential growth in total users, Facebook needs to keep the percentage of total users who show up daily in the mid to high 50% range, at least. Anything lower than that means ads are of lower value and payments will decrease.
As Facebook morphs, tweaks, and modifies the user experience, keep your eyes on daily versus monthly users. If daily users drop, growth elsewhere will be difficult if not impossible.