Facebook may be a good bet for investors now; but regulatory problems lie ahead

Feb 4th 2012 | from the print edition

IT ALL began as a lark. Mark Zuckerberg posted pictures of his fellow Harvard students online to let viewers comment on who was hot and who was not. Eight years later, Facebook is one of the hottest companies in the world. On February 1st the social network announced plans for an initial public offering (IPO) that could value it at between $75 billion and $100 billion. This is extraordinary. Investors believe that a start-up run by a cocky 27-year-old is more valuable than Boeing, the world’s largest aircraftmaker. Are they nuts?

Not necessarily. Facebook could soon boast one billion users, or one in seven of the world’s population. Last year it generated $3.7 billion in revenue and $1 billion in net profits. That is nowhere near enough to justify its price tag. But there are reasons to bet Facebook will justify the hype, for it has found a new way to harness a prehistoric instinct. People love to socialise, and Facebook makes it easier. The shy become more outgoing online. The young, the mobile and the busy find that Facebook is an efficient way of staying in touch. You can do it via laptop or smartphone, while lying in bed, waiting for a bus or pretending to work. You can look up old friends, make new ones, share photos, arrange parties and tell each other what you thought of the latest George Clooney film.

As more people join Facebook, its appeal grows. Those who sign up (and it’s free) have access to a wider circle. Those who don’t can feel excluded. This powerful feedback loop has already made Facebook the biggest social-networking site in many countries. It accounts for one in seven minutes spent online worldwide. Its growth may be slowing in some rich countries—unsurprisingly, given how enormous it already is. And it is in effect blocked in China. But it is still growing fast in big emerging markets such as Brazil and India.