Facebook’s IPO, long a source of speculation, apparently will become a reality soon. Though BetterInvesting’s general guidance has been not to invest in IPOs because the companies issuing them are unproven, this doesn’t seem to be the case for Facebook. The company had revenues of $3.7 billion last year with earnings of about $1 billion. Investors and clubs setting aside a certain amount of their portfolio for speculation might decide that the stock’s valuation, which could be near three digits when the IPO hits, is worth a small investment. (Club transaction data suggests a small amount of investment in similar recent IPOs, such as for LinkedIn and Groupon.)
Despite its past success, Facebook does have an uphill battle to remain on its growth track. Facebook already is seeing some of these challenges. Advertising, which currently composes the lion’s share of revenue for Facebook, will eventually need to show results. Bloomberg recently reported that several retailers, including J.C. Penney, GameStop and Nordstrom, all opened and closed storefronts on Facebook because of apathy by consumers. Pay-per-click campaigns on the site are known for reaching an astounding number of people at a low cost but attracting few of these to click through the ads and make purchases.
Facebook has interesting plans to make advertising more effective, but these are unproven. And there are also new sites popping up and attracting eyeballs, such as Pinterest, which allows users to pin various goods and services they like on a virtual bulletin board.
What might prove to be a bigger challenge is remaining relevant in the fast-twitch world of the Internet and especially social networking sites. Once social networking sites lose their steam, they historically haven’t been able to get their cache back. Remember Friendster? Myspace?
A recent Associated Press article cited a Pew Research Center survey finding that 16 percent of youths aged 12 to 17 are using Twitter. That doesn’t seem like a huge amount, but it’s double the percentage two years ago. They’re employing Twitter to better control their social circles, maintain a certain degree of anonymity and perhaps most importantly get away from their parents, who in growing numbers are now sharing pictures of their children on Facebook. Facebook is trying to address these issues as well, but unless it comes up with ways to keep the younger crowd present, the company might find itself AWOL in AOL Land.