Frost & Sullivan: Facebook IPO -- A Good Buy?

SYDNEY, May 17, 2012 /PRNewswire/ -- There have been mixed reactions with Internet IPOs from companies such as LinkedIn, Groupon, Zynga, and Yelp in recent years, with not all of them having a successful start.

With Facebook's high initial market capitalisation, the initial share price set in the IPO are seen by many analysts as a bit on the expensive side, especially as the initial valuation have already factored an assumption of high revenue growth projections for the next five years.

However, over the long term, there is no doubt that Facebook is in a very strong position to leverage its global reach as the world's largest social media site, with close to a billion users.

According to Phil Harpur, Senior Research Manager for ICT, Frost & Sullivan Australia, while Facebook is already mature in terms of number of social media users, and facing growing competition from Google in this area, it is still relatively immature in terms of their advertising model which is where the vast majority of its revenues currently come from.

"Facebook is currently finding it difficult to compete with Google's more mature and more developed advertising platform. To gain full industry confidence, it will be critical that Facebook spends a lot of time and resources developing its advertising model further. Just recently for example, General Motors withdrew its $10 million advertising budget from Facebook," said Harpur.

He added, "On the flip-side, Facebook's immature online advertising model, combined with their massive global reach, gives them huge potential to grow for very high revenue growth over the longer term and compete head on with Google in terms of advertising revenues. Google on the other hand while still displaying solid growth in online advertising revenues, no longer has the potential for such rapid growth due to its more mature advertising platform."

Audrey William, Head of Research, Australia and New Zealand, ICT also said that whilst the opportunity to grow is immense, one area Facebook will need to be cautious about is in the area of privacy. Many Facebook users have complained about its privacy settings over the past few years and as a result, some have turned away from Facebook. "It is imperative that Facebook addresses privacy issues in order to not get on the wrong side of Governments. If judiciousness is not exercised, the privacy issue could even lead to a complete ban on Facebook by a country's government," she elaborated. "Already there are some countries that have limited Facebook usage or completely banned it, like China. As such, regulation by country regarding privacy laws is something that Facebook needs to be mindful as it could potentially limit their growth and ultimately their revenues," William explained.

Facebook has also only just begun to explore new business models and opportunities in areas such as online shopping, in a similar way to which Google is now diversifying its business model from its origins as a search company only. Frost & Sullivan expects a lot more action from Facebook in this area during the next few years.

"Facebook has so far been successful in making their online platform highly interactive through applications that enable the sharing of media such as photos, content, and videos. Facebook's recent Instagram acquisition is one example of how it is transforming its platform into a one stop shop for social media communication and collaboration," said Harpur.

"It is critical that Facebook continues with this strategy in the coming years and develop richer communications platform where users can not only IM and make phone calls, but have access to functionality such as video conferencing sessions. Current market indications are that Facebook is fairly well placed to succeed with this strategy over the longer term," he continued.

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Media Contacts:
Donna Jeremiah
Corporate Communications, Asia Pacific
P: +61-(02)-8247-8927
E: djeremiah@frost.com

Jessie Loh
Corporate Communications, Asia Pacific
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E: jessie.loh@frost.com

Carrie Low
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E: carrie.low@frost.com

SOURCE Frost & Sullivan