Facebook: Tech's Next Big IPO?

NEW YORK ( TheStreet) -- Options activity in the tech sector is heating up, and there's a list of Silicon Valley companies whose IPOs tech watchers have been speculating about for awhile.

One of them is Facebook, the six-year old social network king with more than 400 million users and an estimated $800 million in annual revenues. But given the fickle history of social networking sites -- MySpace, Friendster come to mind -- what makes Facebook a viable investment target?
Facebook

Facebook is the world's largest social network, easily besting both News Corp.'s ( NWSA) MySpace and Twitter in active users. According to a recent traffic report from Nielsen, Facebook is also the Web's fourth-most popular destination. It's the place where everyone's friends are, and as its user base continues to grow, its revenue potential will likely expand with it.

One of Facebook's key revenue generators is advertising.

Admittedly, Web advertising is difficult to capitalize on. On far too many occasions, Web startups fail to turn a profit on the advertising revenue they generate, simply because the revenue can't match the cost of running a popular site with all of its server costs.

Facebook, like Google ( GOOG), might be able to buck that trend. The company currently offers some of the most targeted advertising on the Internet. Rather than ask advertisers to pick a few keywords and pay for placement on different pages, Facebook instead requires advertisers to target its users by demographic. Advertisers can target ads based on age, location, marital status and more. It's a way of breaking down Facebook's users into small segments, targeting the Web users they really want.

Facebook doesn't provide any revenue details, but USA Today recently said the company might have generated $300 million to $400 million in advertising revenue in 2009 alone.

Another revenue stream is Facebook Credits, a virtual currency that allows users to pay real money for credits that allow them to buy goods in the more than 550,000 third-party applications built for the social network.

It's a smart move. According to market analyst Inside Network, the market opportunity for virtual-goods revenue should hit $1.6 billion in 2010. A key company in that sector, Zynga, provides popular social games like FarmVille and Mafia Wars, which are available on Facebook. Zynga has more than 239 million active monthly users. Inside Network says that social-gaming companies like Zynga could generate $835 million this year alone.

Facebook stands to profit heavily off that figure. The social network recently inked multi-year deals with several gaming companies like Zynga, in which Facebook will use its own Facebook Credits platform. Users will only be able to buy goods with Facebook Credits, and the social network will receive 30% of all revenue generated through those games. That arrangement could help Facebook generate hundreds of millions of dollars on its Credits service this year.

That said, Facebook made it clear that it won't be doing much with those profits over the next several years. Speaking in an interview with tech blog Venturebeat, Ethan Beard, director of Facebook's developer network, said the company will reinvest profits to bolster its service.

Even so, the future looks bright for Facebook, and it could be the big tech IPO the market has been waiting for. Considering how well-positioned it is on the Web and the revenue potential it has, the sky could be the limit for Facebook shares.

--Written by Don Reisinger in New York.
Don Reisinger has been writing columns and blogs about the technology and video game industries for years. His work appears in some of the tech industry?s biggest publications, as well as in the Los Angeles Times, where he blogs about social networking. Follow Reisinger on Twitter @donreisinger.

If you liked this article you might like

Two Artificial Intelligence Stocks You Must Buy

Two Artificial Intelligence Stocks You Must Buy

Bonus White Papers: The FAANGs

Bonus White Papers: The FAANGs

Using Twitter to Trade Stocks

Using Twitter to Trade Stocks

Alphabet Is the Best Tech Stock to Own After the Correction

Alphabet Is the Best Tech Stock to Own After the Correction

Why I Like Amazon, Apple and These Other Stocks for February

Why I Like Amazon, Apple and These Other Stocks for February