Eight years after launching Facebook in a Harvard dorm room, Mark Zuckerberg is about to pull off one of the most valuable stock offerings in U.S. history — and the largest ever in tech — making him one of the world’s richest men, worth nearly $20 billion. Thousands of employees and early investors will reap billions more. But Facebook’s IPO is about more than just big numbers like the company’s $100 billion valuation. It’s about the emergence of the Internet as a global social platform that’s disrupting entire industries. As Facebook (FB) stock begins trading this morning, here are a few things to keep in mind about this once-in-a-decade event.
Facebook’s IPO represents the triumph of hype and hope over financial analysis. This is the most-buzzed about IPO since Google went public in 2004 — at about one-fifth Facebook’s $100 billion valuation. Fundamental factors are hard-pressed to justify that price at present, so Facebook investors are betting on steep revenue and earnings growth over the next few years. With $1 billion in profit last year, the company has an extremely high price-to-earnings ratio of 100-to-1, higher than Google’s when the search titan went public in 2004. And by the time it went public, Google had already built AdWords, the search ad feature that continues to drive its massive profits. Facebook’s ad business is much less developed.
Facebook’s inherently social nature is a challenge for the company’s ad business. People primarily use social services to hang out with their friends, not search or shop. Google, by contrast, is a site that people use — by definition — because they’re searching for something — often something to buy — so there’s a natural opportunity to present ads. When your goal is to share links and photos, ads can seem like a distraction. Meanwhile, Facebook users have given the company a treasure-trove of personal data ripe for targeted advertising. Zuckerberg’s challenge now is to use all that data to generate the kind of profit that will justify Facebook’s sky-high valuation. Google paid off in spades for investors, but it’s far too early to predict a similar outcome for Facebook.
From the beginning, Zuckerberg has prioritized his idealistic social mission ahead of profits. In the company’s IPO prospectus, Zuckerberg wrote that he didn’t view his company first and foremost as a business – or even, really, as a company — but rather as a means of social transformation. “It was built to accomplish a social mission — to make the world more open and connected,” he wrote, adding that Facebook makes money in the service of accomplishing its mission. As co-owners of a public company, investors are going to want Zuckerberg to make Facebook’s business the top priority in order to drive earnings growth. The stock price will depend on it.
But shareholders may have little recourse for action, due to a controversial dual-class ownership structure that has been criticized by corporate governance experts. Zuckerberg owns 55% of the company’s voting control, meaning he will be impervious to takeover attempts or activist shareholders. One can understand how someone like Zuckerberg would want to maintain control of his creation, but by choosing to go public, he has taken on new co-owners, who may want to exercise some influence over their investment. Moreover, this type of absolute control can be a recipe for trouble at big public companies. (See News Corp.)
(More: Why Facebook’s IPO Matters)
Facebook has become a symbol of the global Internet. It began as a start-up story. Then it became a venture capital story. Eventually it turned into one of the great business stories in a generation. Today’s IPO, however, is a milestone in the history of the Internet itself as a tool for individual self-expression and collective organization. It’s also a dramatic example of a generational shift taking place among the entrepreneurial class, one that elevates social change as a priority along with commercial success.
As Facebook goes public, it’s easy to get caught up by the huge numbers, including the $9 billion that early investors and insiders stand to gain. But Facebook’s IPO is about more than a crew of newly-minted young millionaires buying big houses in Silicon Valley. Zuckerberg built an unprecedented platform on top of the Internet that’s changing the media, entertainment and advertising industries. And he’s become an icon, the personification of what a smart young person can accomplish using this new global platform. Today is the culmination of eight years of hard work for the 28-year-old. It’s his big day. He deserves it.