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Facebook Follows Netscape and Google as a Generation-Defining Internet IPO: Should We Care?

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Facebook is finally coming public. Is this IPO heaven on Earth for investors?

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Yesterday afternoon, after an excruciatingly long day, social-media giant Facebook finally delivered its S-1 document for its long-awaited initial public offering to the the good folks over at the SEC.

The ticker? FB.

The dollar amount being raised? $5 billion.

The lead underwriter? Our buddies over at Morgan Stanley (MS), who will be out celebrating their cemented lead spot in the IPO league tables, much to the chagrin of competitors like Goldman Sachs (GS).



Now, the last two technology bull markets each had their generation-defining Internet IPOs:

Netscape's 1995 IPO was a symbol of the age of Internet surfing, which is what the cool people who weren't on America Online did. Remember those days? I recall spending a lot of time in the Brooklyn College library in 1996, going from link to link to link.

Google (GOOG), which came public in 2004, was all about searching as the world's data became increasingly well-organized by an expansive maze of server farms programmed by the biggest brains in Silicon Valley.

And 2012's Facebook is all about today's preferred Web activity -- sharing -- and a lot of it.

Facebook has 845 million monthly active users (MAUs) and sees 2.7 billion comments and likes, and 250 million photo uploads each and every day; 425 million of those MAUs use Facebook mobile products.

As it's expanded its user base, the company's growth has been nothing short of staggering.

In 2007, Facebook had $153 million in revenue.

2011 revenue was an incredible $3.7 billion, up 88% from 2010. However, the bears will point out that this was a slowdown from the 154% revenue growth last year.

2011 operating cash flow was $1.55 billion, up from $698 million seen the year before. Free cash flow was an impressive $943 million, up from $405 million the year before -- significant given the massive growth in capital spending.

Unfortunately, I'm now going to have to put on my Negative Nancy hat.

That slowing revenue growth ties in to a lingering concern I've had -- that the company's exhausted growth in its user base from developed countries, which represents risks to long-term revenue growth. (See: Why a Facebook IPO Could Flop.)

Here were my thoughts back in June of 2011:

My concern is that since Facebook is increasingly reliant upon emerging markets for growth in the user count, that revenue-per-user number is going to drop over time. What may be $10 per user in the United States could easily be $1 in Bangladesh.

So while the user count could theoretically grow six-fold from here, the revenue base may not grow with it.

That means potential multiple shrinkage as investors will be forced to focus on a terminal-growth number for the user base.

Remember the valuation numbers that are being tossed around for Facebook these days. $85 billion. $100 billion. Hell, even $50 billion assumes a ton of growth over the long run.

In the S-1, Facebook directly says "Historically, our user growth has been a primary driver of growth in our revenue." In this company-provided graphic, you can easily see growth in active users leveling off:


Click to enlarge

Note that while Facebook beat the living daylights out of MySpace and Friendster in the U.S., it faces tougher competition in emerging markets, like the Google-owned Orkut in Brazil and Vkontakte in Russia.

And again, those emerging-markets users will be less lucrative on a per-user basis. It's likely over time that Facebook will improve monetization of the user base, but for now, ongoing hyper-growth in the platform would be nice to see.

Elsewhere in the S-1, Facebook says, "Our culture emphasizes rapid innovation and prioritizes user engagement over short-term financial results."

Now this is good to see, as it's awfully reminiscent of Jeff Bezos' philosophy at Amazon (AMZN), which is well-known for ignoring Wall Street's wishes for fatter margins by constantly reinvesting in new products and expansion of the supply chain.

However, as a public company, Facebook must be willing to withstand heat from Wall Street and the financial media, which are obsessed with quarter-to-quarter results.

In this regard, CEO Mark Zuckerberg must take a page out of the late Steve Jobs' book. One reason Jobs took Apple (AAPL) from the brink of death to being the most important technology company in modern history was his willingness to pursue a vision with zero regard for the critics.

Therefore, I view it as a distinct positive that Zuckerberg will retail majority voting control in Facebook following the IPO.

Conclusion

My overall reaction to Facebook's filing is this: meh.

Facebook is an absolutely spectacular company and it has defined today's social Web, but the numbers just didn't knock my socks off.

In fact, this Tony Soprano quote comes to mind once again:

"It's good to be in something from the ground floor. I came too late for that, I know. But lately I'm getting the feeling that I came in at the end. The best is over."

Who was in on the ground floor with Facebook? The smart VC guys that invested years ago.

However, as a wise man once said, the reaction to the news matters more than the news itself, and I'm eager to see how perception of Facebook as an investment evolves. If the animal spirits drive upward momentum, I want in, and I want in big-time.

Facebook is so well-known within popular culture that it has the ability to capture the general public's imagination, and draw their money in huge quantities. The last company to be able to do this was Google, and Facebook sees way, way more use today than Google did in 2004.

If hot money gets behind Facebook, it easily turns into a situation where money managers don't want to be seen without the stocks on their books. After a lousy 2011 for most money managers, the worst-case scenario is to not own Facebook while it is skyrocketing.

Momentum begets momentum, and that's what I'm counting on when it comes to considering getting behind Facebook.

What do you think? Let me know in the comments.

Twitter: @MichaelComeau

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