Facebook Reveals its Ad Revenues: "Wow This is A Massive ad Sales Business." Not at $100B Valuation it isn't - Matthew Kearney

IPO Filing shows ad revenue of $3.2billion in 2011 representing 69% year-on-year growth

Anyone who saw the movie Social Network – fiction I know but pretty faithful to key facts – will know that there was an early disagreement between the founders: build ad revenues or traffic? Mark Zuckerberg didn't flinch and went for traffic, and the other guy (whose name I can never remember but nor can anyone else) headed to the exit door. Traffic exploded, – people's personal information, views and opinions became networked – investors poured in, and now, eight years on, comes the $100 billion IPO.

So goes the saying "if you build it they will come". But there's a saying when attracting investment in business ventures, especially start-ups "it's better to travel than arrive". Facebook has been travelling with its investors and now the IPO is about to arrive. And Wall Street is interested in profits and cash flow, dividends and capital gains…….traffic for traffic's sake not so much.

Of course, Facebook has also brought us the "Like" button, and with it comes ad revenue which we can now see from the IPO filing is significant: $1.9 billion in 2010, $3.2 billion in 2011, 69% growth YoY.

When Business Insider saw that their comment understandably was "wow this is a massive ad sales business".

But the IPO target valuation is $100 billion, that's a valuation multiple of 30 times revenues. There's a lot of science in business valuation. But to make the point please allow me to forgo that and use a good rule of thumb I learnt in my early days out of business school, in private equity: anything greater than 10 times operating profit is rich for any mature business. On that, admittedly simplistic basis, Facebook needs to get to $10 billion of sustainable profit – not revenue - to justify that $100 billion valuation.

Given Facebook's global reach it's totally possible they will get there, but there will be all the challenges of delivering rapid growth plus unforeseen problems. Execution will need to be excellent.

Google did it. Performance post IPO has been terrific.

True, and without doubt Facebook is a fantastic social platform and promotional platform and those revenues stats prove the point. But Google was, and is second to none as a search platform and has executed brilliantly on plan. It has also extended beyond search with Android, YouTube…….and social media.

And for investors in Facebook at that $100 billion valuation that would be my biggest worry. In looking at the "tea leaves" in media and technology it's always useful to check in on what younger people are doing. You know the sort of thing – they use cell phones not landlines, WiFi based video not cable TV etc. And my kids and their friends? They use Google Plus.

Matthew Kearney has been working in the media in London and New York, in TV, cinema and in online for nearly 20 years. He joined the Daily Mail's leading news site MailOnline last year. Matthew can be reached atmatthewjkearney@gmail.com.

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