February 1, 2012, 5:49 PM

Facebook friends Wall Street

The social network files a long-awaited notice of an initial public offering of stock.

Zak Stambor

Managing Editor

Lead Photo

The biggest name in social media, Facebook Inc., is going public. The social network, which says it has more than 845 million active users of its site, today filed its long-awaited notice of an initial public offering of stock, which analysts say values the company at between $75 billion and $100 billion. The firms underwriting the IPO are Morgan Stanley, JPMorgan Chase, Goldman Sachs, Bank of America-Merrill Lynch, Barclays Capital and Allen & Company.

In its S1 filing, the social network says it had had $3.71 billion in revenue in 2011, up nearly 88% from $1.97 billion a year earlier, which was up 154% from $777 million in 2009.

The filing includes a lengthy letter from Facebook founder and CEO Mark Zuckerberg in which he expounds on Facebook’s mission of connecting people. He points out that sharing helps consumers find better products, and companies to design products more suited to its customers. “We have found that products that are ‘social by design’ tend to be more engaging than their traditional counterparts, and we look forward to seeing more of the world’s products move in this direction.”

He adds that Facebook is always been primarily focused on its social mission, which he notes, “is a different approach for a public company to take.” Later on he adds, “Simply put: we don’t build services to make money; we make money to build better services.”

The filing provides a clear picture of where Facebook is making its money to expand its services. Accounting for 12% of Facebook’s 2011 revenue is social gaming provider Zynga Inc. That  revenue stems from Facebook’s 30% take of consumers’ purchases of virtual goods in Zynga’s games, which include Farmville.

Facebook’s profits are also rising. The company says it had $1.00 billion in net income in 2011, up 65% from $606 million a year earlier. The social network’s 2009 net income was $229 million.

Advertising accounts for the vast majority of Facebook’s revenue. In 2009, 2010, and 2011, ads on the social network accounted for 98%, 95%, and 85%, respectively, of revenue. Marketers advertise on Facebook because consumers share a wealth of data on the social network, which, in turn, advertisers can use to target consumers with ads. The amount of data Facebook has is rapidly growing, as today’s filing says that Facebook members add 2.7 billion Likes or comments a day, an average of 3.2 interactions per user per day. 

“What makes Facebook so valuable is having close to 1 billion users—what else is that big?” says Rebecca Lieb, digital advertising analyst at research advisory firm Altimeter Group. “And Facebook has a vast amount of data on nearly 1 billion users. That data is really what Facebook’s product is.”

In order for Facebook’s profits to markedly grow, Facebook has to figure out ways to make better use of its consumer data, much like Google has been able to capitalize on the data it gathers, says Nate Elliott, a Forrester Research Inc. analyst.

“Facebook has a ton of data that marketers can use to target users on their site and elsewhere,” he says. “But it’s a less valuable type of data than the data Google gathers. Facebook’s data tells advertisers what a person is interested in generally—Google tells advertisers what a shopper is looking for right now. So it’s immediately less valuable data.”

Facebook’s future growth, fueled by the cash infusion from the IPO, may come from the company expanding via acquisitions, say experts. “Facebook has made minimal acquisitions to date,” says Lieb. “The acquisitions they have made have mainly been small companies that are more for personnel than technology. But it makes sense that acquisitions might be one way to continue to grow.”

That may be adding a platform provider that could provide expertise in linking advertisers to consumers, says Elliott. It could also buy a social marketing tools provider to help marketers bolster their Facebook pages, indirectly boosting Facebook ad revenue if that results in consumers spending more time on the social network. “If they could find a good platform provider that could make pages better and they could give it away to marketers, it would likely drive more display ads that marketers would use to guide consumers to their pages.”

Mobile represents another arena where Facebook might expand, using funds from the IPO, says Lieb. Facebook notes in the filing that its lack of advertising on mobile devices is a potential soft spot that could limit potential growth. “They have to find ways to monetize mobile,” Lieb says. “They haven’t found a way yet, which isn’t to say that they’re not going to try, but they won’t be able to do so by Thursday—or whenever its stock begins trading.”

Regardless of Facebook’s current profits, many investors are going to want to add Facebook to their portfolios because they view the social network as the “next Google,” says Josef Schuster, founder of IPO research and investment house IPOX Schuster. The stock will likely have an initial infusion of interest because of its small float. That small float is generally aimed at artificially piquing interest and boosting value for pre-IPO investors, he says. For other investors the small float means there will be more supply down the road. “They’ll have demand initially,” he says, “then people will begin to invest with a calmer head,” he says.

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