Setting the Record Straight on Facebook’s Profitability

I was wrong about Facebook’s profitability (but right about its costs).

When I read that Facebook posted net income of $1 billion in 2011, I first thought it was a misprint. However, the pioneering social network’s gain is my loss.

A few days ago, in the “Great Facebook Profitability Question,” I tried to warn readers about the hype surrounding the Facebook IPO and argued that the social network “may not be earning much if anything in the way of profits.” I went on to say, “If Facebook were profitable, it seems one of Wall Street’s many anonymous sources would have said something to the press.”

To my credit, my analysis would have been spot on — if this were 2007. The company lost $138 million that year. It rebounded quickly and a year later the loss narrowed to $56 million. In 2009, Facebook turned a profit, and it has been making money hand-over-fist since then. How the gossips on Wall Street managed to keep this fact secret, especially given the bad publicity that has greeted money-losing tech IPOs, is beyond me.

But before I look to impale myself onto something sharp, I have to remember that I was right to be concerned about Facebook’s costs. Between 2009 and 2011, its total costs and expenses rose 280% from $515 million to $1.95 billion, according to Facebook’ S-1 filing. Of course, during that same time revenue rose 377% from $777 million to $3.71 billion. As of December 31, 2011, Facebook boasted more than 100 billion friend connections. It had 845 million active users, up 39% versus December 2010.

Those are truly remarkable figures, a testament to Facebook’s place in cultures worldwide and the strength of its ecosystem, which I underestimated. Still, I don’t believe they can be sustained.

Facebook is fortunate that its revenue growth outpaces the growth in its costs. However, it also warned investors that the situation may not last as it continues to add servers, computer storage and workers. Facebook had 3,200 employees as of the end of 2011, a 50% increase over the previous year. The hiring binge shows no signs of ebbing. Ditto for its other expansion plans.

“Our employee headcount has increased significantly and we expect this growth to continue for the foreseeable future,” the filing says. “We have also made and intend to make acquisitions with the primary objective of adding software engineers, product designers, and other personnel with certain technology expertise. While our organization is growing rapidly, we are focused on increasing our talent base at a rate that allows us to preserve our culture.”

Although I’ve gotten in trouble making Facebook predictions, I’m going to make another one: Facebook’s shares will be as unpredictable as company founder Mark Zuckerberg. The Internet whiz kid has done just what he wanted to do with the company he founded in his Harvard dorm eight years ago, and when he’s wanted to do it. Once Facebook goes public, Zuckerberg will have to answer to Wall Street, which is a fickle friend at best.

Eventually, Facebook’s growth will slow, and its shares will tumble. When that day comes, though, I’m not going to predict.

Jonathan Berr “likes” Facebook.

Article printed from InvestorPlace Media,

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