Falling flat on your Face(Book)

As anyone who has not been spent the last couple of months living off the grid will be aware, social networking giant Facebook (NASDAQ:FB), the brainchild of the hoodie-wearing, university-dropout Mark Zuckerberg, has gone public.

Before it kicked off its Initial Public Offering (IPO) roadshow, FB indicated it would be selling 337.4m shares (12.3% of the company) at somewhere between $28 – $35 a share, valuing the company at $96bn if it achieved the top end of the range.

Subsequently the company raised it’s target price range to $34 – $38 a share, which would value the company at just over $104bn.

Then, on Thursday, once the IPO had closed FB confirmed the final details of its listing: 421,233,615 shares at $38 a pop, raising $16bn and confirming an initial market capitalisation of approx. $104bn.

Given that in 2011, FB made $1bn profit on a revenue of $3.7bn that means it started off trading at over 28 times earnings. Apple at its peak share price of $644 was only trading at 5 1/2 times its eventual 2011 earnings and is now down to about 4.6x. Google is currently valued at just over 5x, Microsoft 3.5x, Intel 2.4x, Amazon 2x…

Facebook makes most of its money through advertising. It is thus concerning that their click through rates are below average. You can add to this their admitted problems with trying to making money on mobile traffic.

Yet, even given what – to me – looked like a company which has been horrendously overvalued, investors and analysts were expecting a first day ‘pop’ with, at the wilder end, estimates of 50% being made.

What they got instead was a fizzle with the shares closing up a paltry $0.23 (0.61%) – having opened at $42.05 (10.6%) and briefly touched $45 (18.4%) – and it seems that the only reason they didn’t close down was that the banks who underwrote the IPO took up their option to buy an additional 63,185,042 shares.

If I’d been silly enough to buy Facebook shares I’d be looking to cut my losses ASAP.

For comparison, here are the IPO and first day close details of some other internet companies:

Company Date Shares Float Price ($) Approx. Mkt Cap ($m) Close Price ($) % rise
Amazon (NASDAQ:AMZN) 1997-05-15 3,000,000 18 438 23.4 30
Google (NASDAQ:GOOG) 2004-08-24 19,605,052 85 23,000 100.34 18
Groupon (NASDAQ:GRPN) 2011-11-03 35,000,000 20 12,700 26.11 30.6
LinkedIn (NYSE:LNKD) 2011-05-19 7,840,000 45 4,410 94.25 109.4
Zynga (NASDAQ:ZNGA) 2011-12-16 100,000,000 10 7,000 9.50 -5

Still, I doubt Zuckerberg will be too worried. Even after selling 30.2m shares in order to satisfy the IRS, his net worth weighs in at approx. $19bn.

Given that then you’d have thought he’d have been able to hire himself a nice suit for his wedding…

Mark Zuckerberg with wife Priscilla Chan

2 Comments

  1. The Thought Gang says:

    I’ve been trying to think of scenarios whereby Facebook could become a great investment. They’re out there, but they are not entirely pleasant. $100bn (or whatever) is a lot of money for a company making $1bn a year. But is it a lot to pay for a company with a direct line into the homes of 1bn of the worlds more affluent consumers? And a mighty database of their interests and preferences, and those of their friends and networks. Facebook knows more about those people than any government, any media organisaion, or any company that those people do business with.

    The death of print media is coming, the high-street is losing market share of retail, and television (as we know it) is not a long-term thing. I can quite imagine the lions share of marketing and advertising spend ending up online to be, broadly, carved up between the search engines and the social networks. Facebook could easily become the biggest advertising platform on the planet.. swallowing up all the money invested in TV advertising at the moment. Click-throughs might be poor at the moment, but the userbase is probably still pretty young.. but increasingly moving into the ‘woo, disposable income’ years of carefree consumption.

    That’s before we get into attempts to monetise the service directly via paid subscriptions for enhanced services, virtual property, or self-promotion. Grab $2 per user and, all of a sudden, that earnings multiple starts to look quite tasty.

    What we know is that Zuckerberg (et al) have scant regard for user privacy and preference, and that the vast majority of users don’t much care. One may therefore conclude that the majority are idiots and, thus, it’ll be pretty easy to make a few quid out of them.

    I’m not a buyer. But I’m yet to be convinced that this is going to be the car crash that some are predicting.

    • Misanthrope Girl says:

      Whilst they certainly have the information (seemingly half the planet is signed up – with 2/7 of those being classed as ‘active’ users) it doesn’t do them a lot of good as data protection laws limit what they could get up to.

      Print media is a walking corpse but the advertising which sustains the dead tree editions already appears on the screen. The death of the high street (as a retail experience) is nigh, although the large shopping centres – especially those out of town with large amounts of free parking – will survive for a quite a while yet and retailers of all types will advertise,

      Yes, FB has the potential to be one of the world’s largest advertising platforms and with the data that they have they should be getting very good at targetted advertising by now but do the high st or e-tailers advertise on that platform? These are companies which will happily advertise on Google but don’t seem to be doing so on Facebook. Or, they are doing what GM have done and pulling their business saying that the returns aren’t worth it.

      With the average age of their users already over 30 and thus likely to be in possession of a disposable income stream, FB should already have worked out how to extract as much money as possible from them – or how to assist advertisers in doing so. It doesn’t seem that they have.

      Simply they haven’t turned their numbers into kind of money which justifies a $100bn valuation. One day they might but they have a lot of work to do first and need to do it in an environment where they are no longer a new and exciting player.

      We shall see.