As Facebook approaches the release of its initial public offering (IPO), which will raise $10 billion for the 8-year-old Internet giant, many customers and investors are speculating as to what it will do with all that money and whether it's enough. A $10 billion capital raise catapults Facebook's IPO to the fourth largest, after VISA, General Motors and AT&T Wireless. Moreover, the IPO will make the company number one in Internet company offerings.

SEE: Evaluating the Facebook IPO

Financial Needs
The problem with analyzing Facebook's capital needs is that the company is currently private and, therefore, releases very little financial information publicly. Analysts and research firms estimate Facebook's annual revenues at approximately $3.8 million. How it disperses its cash inflow is unknown. We do know that in 2009 the company was seeking new debt financing after having a line increase denied by a current creditor. Facebook needed more funding to lease additional computer equipment to host and service its ever-growing base of users, which has more than doubled over the past few years.

Workforce
As Facebook grows its user base, it will also have to grow its labor force. In 2011, Facebook set up a second headquarters, having outgrown its first. Further growth will increase the company's need for physical office and development space, as well as new employees. According to CNET, Facebook intends to grow to a staff of 9,600 in the next few years. That type of instant growth requires a lot of capital, especially when there are still questions about Facebook's overall profitability.

Revenue
Currently, Facebook's main source of revenue is derived from advertising on the site. Companies pay per display for ads that appear on the right hand side of a user's account. Advertisers can specify which users can see their ads, defining the target market that best suits their budget. While it is likely that ads will continue to be a main source of income for Facebook, the company is expected to branch out into other areas currently occupied by its competitors, such as Google and YouTube. Google's continued advance into Facebook's territory has forced Facebook to ramp up its team to give users a richer experience and and to attract more advertisers. This continued development will take a chunk of the IPO funds.

The big question is: will Facebook buy more companies with its newfound wealth? If it wanted to take a run at Google's search engine, it could make an offer for Yahoo or Bing. Yahoo's valuation is unclear, especially in light of its recent poor performance. Microsoft is unlikely to give up Bing as it is holding its own as a legitimate search engine contender. If Facebook contemplates any purchases, they will likely be smaller companies with potentially valuable patents and licenses. However, Facebook's history suggests that it is more willing to collaborate with other companies (such as Spotify and Netflix) than to buy them outright.

Perhaps one of the best plans for Facebook's new wealth will be to keep it in the bank. Although it has had an impressive track record of growth, its ability to turn a profit is still a question mark and it is likely that the company will need rainy day funds in the future. This is especially true as Google continues to develop its "Facebook Killer" product, Google Plus.

The Bottom Line
Being able to garner $10 billion in an IPO is an impressive feat, but all that is important is how Facebook employs that capital. As investors wait for the initial filing, Facebook is keeping its plans close to its chest.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  2. Investing Basics

    If You Had Invested Right After Amazon's IPO

    Find out how much you would have made if you had invested $1,000 during Amazon's IPO, including how the power of the stock split affects investment growth.
  3. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
  5. Technical Indicators

    Key Financial Ratios to Analyze the Mining Industry

    Discover some the most important financial ratios used by investors and analysts to evaluate companies in the metals and mining industry.
  6. Technical Indicators

    Key Financial Ratios to Analyze Retail Banks

    Learn about key financial metrics that investors use to evaluate retail banks, and how the industry is fundamentally different from most other industries.
  7. Technical Indicators

    Key Financial Ratios to Analyze Airline Companies

    Examine some of the most important financial ratios and performance metrics investors use to evaluate companies in the airline industry.
  8. Stock Analysis

    The 5 Biggest Canadian Oil Companies

    Obtain information about some of the largest and most successful major integrated oil corporations that are headquartered in Canada.
  9. Technical Indicators

    Key Financial Ratios to Analyze Tech Companies

    Understand the technology industry and the companies that operate in it. Learn about the key financial ratios used to analyze tech companies.
  10. Stock Analysis

    3 Reasons to Continue to Own Monster Beverage

    Learn more about the Monster Beverage Corporation and some of the primary reasons why investors and market analysts like the stock.
RELATED TERMS
  1. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  3. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  4. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  5. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
  6. Long-Term Debt

    Long-term debt consists of loans and financial obligations lasting ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  3. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  4. How can EV/EBITDA be used in conjunction with the P/E ratio?

    Because they provide different perspectives of analysis, the EV/EBITDA multiple and the P/E ratio can be used together to ... Read Full Answer >>
  5. How can a company reduce the unsystematic risk of its own security issues?

    Companies can reduce the unsystematic risk of their own security issues simply by doing the most effective job possible of ... Read Full Answer >>
  6. What kind of assets can be traded on a secondary market?

    Virtually all types of financial assets and investing instruments are traded on secondary markets, including stocks, bonds, ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!