So it's finally happened, Facebook's IPO. It's been talked about for months with an estimate value of anywhere from $23 per share and up. The actual price came out at $38, valuing the company at $104 billion! Not bad, but is it worth it?
In 2011 Facebook took home just over $1 billion in profit. I agree that's a lot of profit but no matter what way you look at it, valuing the company at 100 times their operating profit just seems wrong. I'm sure everyone remembers the last time Internet companies were so highly valued, it was only a little over a decade ago and it didn't end well. Those companies couldn't live up to the hype or create the profit that their value promised. Facebook has huge potential but it's such a new company, in an entirely new market, with so many users and so much information. It's all unchartered territory and at the moment Facebook has stumbled in the right direction. Now, after the IPO, they need to be steered to further profit.
And that's really the bottom line, you put your company on the markets and they'll expect you to make money for them. If you're not doing that then your share price will drop. Facebook is valued high because it's popular, as simple as that. Maybe some think that it's a good bet and that Facebook will keep churning out more and more profit. That hardly seems like sage advice considering, by Facebook's own admission, that they expect a fall in profit. Combine that with the actual figures for the first quarter of 2012; rising revenue, falling profit. Does it still seem like a $104 billion company?
Despite all the news and even Facebook warning of trouble ahead, the market hunger for the IPO remained unaffected. The crazed blood hungry traders want those shares at any cost and that's just what they got. What's interesting is that other early private investors were actually cutting their shares by much greater margins at the last minute. It doesn't seem to say much about their confidence in the stocks. If you expected the stocks to perform well then you wouldn't sell half of them. If you thought you could get a good price now and wanted to hedge your bets, then you would sell. Goldman Sachs and Tiger Global Management, who originally decided to off load 23% and 7% of their shares, suddenly upped it to as much as 50%. Obviously admitting to sell 50% from the start could have negatively affected the share price, although probably not since the markets have ignored all the other snippets of bad news.
So far we have falling profits, rising revenue, high share prices, bailing private investors and an unrelenting market. BubblejQuery1520010906498180702329_1337332560782 But it doesn't end there. Facebook need to turn the company into more profit. So far that's been the standard Internet advertisement modal. Selling adverts in little blocks on their website. Yawn! Generally that means around the 3-5% click through rate. If Facebook has the estimate 900 million daily users then that equates to roughly 36 million clicks a day. But does it work for sales? GM doesn't seem to think so, completely abandoning their $10 million advertising campaign on Facebook.
Facebook need to adopt a new modal. The problem is it doesn't exist yet. Now the IPO has passed the pressure is on to find that modal quickly and to make it work. Time will tell but at the moment all the signs point to an over-inflated market price. Facebook obviously isn't going anywhere any time soon, it's too big, but the markets prices needs to accurately reflect its value and a $1 billion yearly profit would take quite a while to generate the $100 billion price tag. Which means a lot of the price is built purely on expectations.