Tuesday, 7 February 2012

Risks associated with Facebook Class A Shares - S1 Filing Extract

S1 filing stated several risks for Class A shareholders of Facebook. I am mentioning one out of them. 

"Our financial results will fluctuate from quarter to quarter, which makes them difficult to predict.

Our quarterly financial results have fluctuated in the past and will fluctuate in the future. Additionally, we have a limited operating history with the current scale of our business, which makes it difficult to forecast our future results. As a result, you should not rely upon our past quarterly financial results as indicators of future performance. You should take into account the risks and uncertainties frequently encountered by companies in rapidly evolving markets. Our financial results in any given quarter can be influenced by numerous factors, many of which we are unable to predict or are outside of our control, including:

our ability to maintain and grow our user base and user engagement;

our ability to attract and retain advertisers in a particular period;

seasonal fluctuations in spending by our advertisers;

the number of ads shown to users;

the pricing of our ads and other products;

our ability to increase payments and other fees revenue;

the diversification and growth of revenue sources beyond current advertising and Payments;

the development and introduction of new products or services by us or our competitors;

increases in marketing, sales, and other operating expenses that we may incur to grow and expand our operations and to remain competitive;

our ability to maintain gross margins and operating margins;

our ability to obtain equipment and components for our data centers and other technical infrastructure in a timely and cost-effective manner;

system failures or breaches of security or privacy;

inaccessibility of Facebook due to third-party actions;

share-based compensation expense including approximately $million that we will incur in the quarter of the completion of our initial public offering in connection with the vesting of restricted stock units (RSUs) granted prior to 2011;

adverse litigation judgments, settlements, or other litigation-related costs;

changes in the legislative or regulatory environment, including with respect to privacy, or enforcement by government regulators, including fines, orders, or consent decrees;

fluctuations in currency exchange rates and changes in the proportion of our revenue and expenses denominated in foreign currencies;

fluctuations in the market values of our portfolio investments and in interest rates;

changes in U.S. generally accepted accounting principles; and

changes in business or macroeconomic conditions."

Facebook has been valued around $100 billion which effectively makes it 100 times more than their 2011 Net Income. Considering all the risks which have been mentioned in their S1 filing can a company be valued 100 times more than its earnings? Well The answer is clearly Facebook. 

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