Tuesday, 22 May 2012

Facebook's IPO.

I called the Facebook IPO 'the greatest short in history'. Very simply the stock is priced at insane multiples. I don't care how fast something's growing. Facebook tradung is trading on 19 times turnover and 68 times 2011 earnings (following it's fall below the offer price to $34), down from just under 100 times in the heady, underwritten, first few minutes of trading in Facebook shares.

Laughing because he sold his stock at $38 AND kept control of the company.

It may know the social networks of about 1,000,000,000 people, but laws in the countries where the richest half live prevent Facebook exploiting that information in any meaningful ($) way. So Facebook is just another advertising platform, one which doesn't work very well on the bits of the market, mobile, which are growing fast; and nor can it drive revenue from office workers or anyone with an ad-blocker.

In 2011, Facebook generated $3.7bn of which 85% was advertising, and the vast majority of the rest was fees from Zynga, who are repsonsible for Farmville amongst others - (is that the one where someone throws a sheep at you?). It's not as if Facebook adverts are particularly effective. General Motors found themselves less than impressed about the click-through rate from Facebook ads and don't advertise there any longer. Neither is the fee revenue secure Zynga has been trying to move its games off the Facebook platform, in order to capture more of the revenue, so I can't see this as a stable revenue stream either.

Previous internet successes have been selling things - Amazon; providing games: zynga; taking a cut of other people selling things - Ebay; or providing a service - web hosting, consultancy etc and so the internet becomes just another channel, not a fundamental part of the business. Facebook is searching for the holy Grail of the internet - monetising eyeballs. The people who've been doing this with print - newspapers - for a couple of centuries have so far been unable to monetise eyeballs online. Only Google has managed this so far, and it has broadly done so unobtrusively by providing adverts WHEN PEOPLE ARE LOOKING FOR SOMETHING. If google can put the right ad under your nose in response to your search, Google has helped you find what you need. Facebook, on the other hand expects you to be interested in shampoo WHEN YOU'RE TALKING TO YOUR FRIENDS.

This simply ain't going to work, however many billions are connected, they are going to seek to ignore ads. Facebook may then try to make the ads more noticable, which in practice means manipulative and obtrusive. And those billions connected on Facebook may not stick around to be sold to when another social network comes along. It's true, teens spend 15% of their online time on Facebook. But most heavy Facebookers I know have already migrated to Twitter, which doesn't change its look every 5 minutes and doesn't bombard you with adverts. The net-natives are leaving. The cool kids will follow them. When the cool kids have gone, everyone else will eventually follow. Like they did with MySpace, Friends Reunited, Bebo and every other social network to come and go.

And the market, this time appears to have learned the lesson of the .com boom. Facebook is profitable, with growing revenue streams, and isn't without value. Because the company is so young and growing so fast, a high multiple is warranted. However The investment banks, it appears have got caught up in the hype, and looked at the potential, without pricing the risks. And because the decentralised decision-maker is better than the experts, the market is going to see that the underwriting investment banks lose a lot of money. Possibly even more than they earned in fees.

Google, by comparison is trading on 21 times 2011 earnings. Apply that multiple to Facebook which is growing faster, but has less security of eyeball, and lower ad-effictivenessand you have a shareprice of around $10-12. Apply extra caution about the corporate Governance which sees an untried 27-year old retain 57% of the voting rights. This would make Facebook a $20-odd bn company, not a $100bn one. Still big, but get real, people. Buy* facebook below $12 a share.

*This does not constitute financial advice, and you should seek advice from a professional advisor. Stocks & the income on them can go down, and may not be suitable for your needs. Past performance is not a guide to the future, yadayadayada. If you've read to the bottom of this disclaimer, you need to chill out & get a life and I recommmend you don't invest in stocks, but take a trip to Amsterdam where you can get laid for €30 and have a big fat doobie afterwards.


Simon Jester said...

Good article, although the Dutch have now banned foreign tourists from entering hash cafes:

Jackart said...

You read to the bottom of the disclaimer...

Simon Jester said...

...and gave serious consideration to the advice offered.

bilbaoboy said...

Me too

bilbaoboy said...

And for exactly the reasons you state, I told people to go nowhere near Facebook.

North Briton 45 said...

While I concur with all the above, the last paragraph was the best bit.

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