Bono may be ringing in a new era at Facebook, but will their stock continue to rise?

SUCH is the frenzy surrounding Facebook’s initial public offering that it is possible to get odds on whether Mark Zuckerberg or even shareholder Bono will ring the bell to start its first trading session on an as yet unspecified US stock exchange.

The numbers are pretty attention-grabbing: Facebook has 845 million users and the flotation could value a business set up in a student’s bedroom barely eight years ago at $100 billion (£63bn). Given that the company made $1bn off revenues of $3.7bn last year, the multiples might not look attractive to the average British investor.

Michael Hewson, an analyst at CMC Markets, says it is not easy to place an intrinsic value on such a unique company.

“Its recent revenue growth path has been impressive. However, the key question is will Facebook be able to maintain the current growth path in a market that Google, with a market cap of $190bn, is starting to move into,” he says.

Google is the benchmark against which Facebook is being measured, and has also emerged as its main competitor. It is already treading on Facebook’s toes with its own social networking platform, Google+, launched last year.

Out of dozens of rivals around the world, Facebook highlighted Google+ as its biggest risk in terms of competition. In details of the business filed with US authorities ahead of the flotation, Facebook admitted it was struggling to generate meaningful revenues from mobile devices, which offer simplified versions of the site with no room for advertising. Google already has a significant presence in that fast-growing market and will probably start building its social network into its Android platform for mobile phones, giving it a significant advantage. About 30 per cent of mobiles sold in the US now run on Android.

Facebook makes most of its money from advertising revenues, which hit $3.2bn last year. But its growth rate is already slowing – sales were up 69 per cent last year, compared with 145 per cent the year before – and, more worryingly, there are reports that some advertisers are unhappy with the results. Again, Google’s offer to target advertising at people searching for something specific seems more attractive.

Given all that, few analysts are willing to stick their necks out and recommend buying into the shares when they become available, probably in May. Hewson concludes: “Looking at all of these numbers, it probably pays to be cautious. Facebook could well be another Google, but at the estimated $100bn valuation, it is a bit of a punt.”

Sheridan Admans, investment research manager at The Share Centre, has warned of the risks of investing in a newly floated company, pointing out that 59 per cent of US IPOs launched in 2011 suffered a decline in share price by the year’s end. He suggests the sensible investor should wait until a stock “has been in the public focus for some time”.

Of course, by then it will probably be too late to enjoy the spectacular gains that the next Apple or Microsoft might give those bold enough to back it early on. Facebook bulls could point to its smaller, business-oriented peer LinkedIn, which floated at $45 per share in May 2011 and was last week trading around the $72 mark – an increase of more than 60 per cent in under a year.

In that respect, Zuckerberg has something to thank his biggest rival for. Originally priced at $85 each and valuing the company at more than 120 times its earnings on flotation in 2004, Google’s shares hit a high above $600 in 2007. Some say that astronomical rise is the reason Facebook can consider a valuation of $100bn.

But Google didn’t get where it is now by simply growing its original, and at that time only, business as a search engine. John Halton, advertising, technology and media partner at law firm Cripps Harries Hall, says Google used its IPO billions to fund new products and acquisitions that have created a “massive ecosystem of interrelated services”, covering everything from video content to the world’s biggest-selling smartphone operating system. Therefore, he says, the key question is what Facebook plans to do with the money it raises from the flotation.

Zuckerberg is tight-lipped about any plans he may have, but he has made clear that he encourages an innovative mindset at the company. He called it “the hacker way” and revealed that he insists on regular “hackathons” in which employees get together to build prototypes of ideas they have contributed.

It is the value that can come from such an approach, in a company that can already point to phenomenal success, that attracts investors with the steel nerves necessary for an internet IPO. They are buying into the American dream in the hope that 27-year-old Zuckerberg, who is staying firmly in control of the company, will turn out to be the next Steve Jobs.

Facebook has also opened itself up to other innovators, and one company built entirely on the Facebook platform – games developer Zynga – has already reached a value of more than $7bn in its own right and contributes 12 per cent of Facebook’s revenues.

With the potential for many others to follow suit, those buying in at $100bn could yet have the last laugh. But for investors who truly have an appetite for risk and want quick returns, bookmaker Paddy Power is offering 100/1 on Bono to ring the opening bell on the day of the Facebook flotation.