What happens to Facebook after its IPO?
This week, the company filed paperwork in preparation for an initial public offering of stock. The paperwork values Facebook at as much as $95 billion, with a per-share price range of $28 to $35. The company is now taking its message on the road, trying to drum up investor interest. While there's plenty of attention on who will get a piece of Facebook, there are also plenty of reasons why its stock price might not leap off the charts.
Here are four reasons why Facebook's success in the stock market is anything but a sure bet:
An Unpredictable Tech Market
Looking at a few other tech stocks, the outlook can seem rosy. Yelp's share price has grown by 38 percent since its IPO, and LinkedIn's has more than doubled, according to figures compiled by the Associated Press.
Then again, there may be need for caution. Game maker Zynga's share price is down 14 percent from its December 2011 IPO price. Groupon's price has fallen 48 percent. Pandora's per-share price has fallen 46 percent since its June 2011 offering.
In other words, it's tough to discern a trend in the tech industry's stock market showings. But even if there were a clear direction, the tech sector is far more unpredictable than other industries.
"In general you'll find that industries move in parallel, because what's good for one oil company will be good for another oil company," says Craig Chapman, a professor in the Accounting Information and Management department at the Kellogg School of Management at Northwestern University. "But in the tech business it's slightly different," he says.
In part, that's because these different sites occupy different industries, and fulfill different roles for users. And even those sites with a broad reach—like Pandora or Groupon—can potentially slide even while they remain popular and other tech stocks soar.
"So much innovation is going on in this space, why do we think nobody's going to come and eat [Facebook's] lunch?" says Chapman. True, it can be hard to imagine an Internet without Facebook "share" buttons on every article, video, and blog post, but Chapman notes that black-and-white TVs also once dominated Americans' living rooms.
A new innovation that catches on can quickly and unexpectedly blow away the competition. The Internet's early search engines—Altavista, HotBot, Lycos—now seem like distant memories, in part thanks to Google, which has bested not only those smaller engines, but also search giant Yahoo!.
Another site that discovers the magic formula for social media success could one day threaten Facebook's ubiquity. Likewise, Facebook could misstep, giving the advantage to a competitor. In a February SEC filing, Facebook acknowledged privacy policies—where it has notably irked users in the past—as a risk factor. If the company "adopt[s] policies or procedures related to areas such as sharing of user data that are perceived negatively by [its] users or the general public," says the filing, it could hurt the company's performance.
Huge but Slowing Down
In the first quarter of this year, the company's revenues fell by 6 percent from the final quarter of 2011, its first such decline in two years. In addition, growth in its base of regular users has recently slowed considerably.
These numbers may not indicate real problems at Facebook -- after all, its membership can't skyrocket forever -- but it could signal growing pains for a company in the midst of what one might consider its adolescence.
"The company is entering a maturation process," Francis Gaskins, president of IPOdesktop.com, told the Associated Press. "I think their core business slowed more than they thought for the past four months."
What's it Worth?
As Time noted this week, Facebook has yet to perfect its advertising strategy and is not seeing consistent growth in that area. So even while its active user base creeps toward 1 billion, monetizing that popularity still can look iffy. With these types of questions about long-term revenue looming, some investors may not be willing to pay $28 to $35 per share.
"If we put their financial reports into spreadsheets [and] forecasts, in order to justify a valuation anywhere close to the numbers for the IPO, we have to put some pretty aggressive growth assumptions in there," says Chapman.
However, the company's high valuation may very well be justified. "The valuation does seem high relative to their most recent revenues. However, I don't think the optimism is unwarranted," says Arun Sundararajan, an associate professor of Information, Operations and Management Sciences at NYU's Stern School of Business. "Where the attention goes, the advertising dollars go, and Facebook isn't a single-feature product. It's a whole spectrum of things. I don't see them losing consumer attention anytime soon."
Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via e-mail at email@example.com.