Well, despite the state of the world economy, Facebook finally managed it’s IPO today and ended the day at roughly the same level as it launched at, having had a high point of about $42 and a start point of $38. Now, when I were a lad we did IPOs differently – take the VA Linux IPO in the 1990s – a first day increase of nearly 700% on the starting price…..
But the world is different today, and the markets are older – although given recent behaviours not any wiser. The Facebook IPO was never going to be a show-stopper of the type we saw in the first dot-com boom, no matter how people hyped it up. But, even Linked In, that had it’s IPO more recently, opened at $45 and closed at around $90 on the first day. So what happened to facebook, and why should we care?
To start with, the opening price was, in my opinion, incredibly high for a company that simply peddles user generated content, games access, in game currencies, personal data access and adverts. And that’s why we should care, because ultimately the value of Facebook will depend upon how advertisers and data crunchers value that content and the 900 million users of Facebook, and whether those users will keep playing the Facebook game.
Why did Facebook go public? Traditionally, companies go public when they need a market in which to sell shares in the company to investors in order to raise money, typically for expansion, moving new products to market, etc. In recent years – especially in tech industries – the IPO has been seen as a means by which the people involved with the startup can flog their shares and get rich quick, and I’m afraid that’s what I see happening here.
The big question is – how is Facebook worth $100 billion dollars? That’s more than Ford and more than Macdonalds. Last year Facebook returned a profit of a billion dollars on revenue of 3.7 billion dollars, which isn’t bad going. Ford had revenues of over $100 billion, and profits of over $6 billion in 2010, having reduced it’s debt by $12 billion in the same year. Not bad either. But Ford only has a market capitalisation of $38 billion. So, that market capitalisation of Ford of 38 billions is related to a profit of $6 billions. Now, whilst you can’t compare Internet and non-Internet stocks, if I were to apply the same rules I’d start thinking that Facebook should, on those proportions, be floated at no more than $6 or $7 billion.
Let’s be fairer and take Google as our reference point. It’s Internet stock, after all. Current Market Capitalisation of $197 billion, revenue of $40 billion and income of $10 billion. Applying some ratios again, Google seem to have a profit of about 25% of revenues, and a Market Cap. of around 5* revenue. Now, Facebook has profits which are not that far off of the same ratio as Google – 1/3.7*100 = 27%, so if we apply the 5* rule we get 5*3.7 billion – let’s be generous and say $20 billions.
So, Joe’s rough and ready calculations say that Facebook should have sold at $20 billions. Now, I’m not a stockbroker – in fact, I’m not brilliant with money at all, but this seems….logical. The difference between Google and Facebook, of course, is the magic words ‘Social Media’. After all, Social is the future, according to the pundits, so it must be logical that the Facebook valuation reflects something of the massive profits that people expect to make from Social Media in future. Yes?
Right…let’s look at Linked IN. Recentish float, social media company, not so many users, blah, blah. Market capitalisation of $10 billion dollars (no missing zero), Revenue about $670 million, profits about $17 million. Oooer. So Social isn’t necessarily the magic word.
So what could that magic ingredient be? What do analysts think makes Facebook worth so much? Do me a favour. If, like me, you’re a Facebook user, walk to the bathroom, look in the mirror. Say Hi. You’re looking at 1/900 millionth of Facebook’s secret sauce. Those investors are putting a lot of money in to the hope that we will continue spending money that can, in some way, be associated with our use of Facebook. Now, I’ve not spent a dime through any Facebook related advert, game or doohickey in the 4 or so years I’ve been on there. I rate every advert that pops up in my Timeline (except for the ones from Charities and non-profits) as offensive. How we use facebook from here on in will make or break a lot of fortunes.
If you want something to put a smile on your face today, remember that 1/900 millionth of Mark Zuckerberg’s arse is yours. Collectively, Zuckerberg is our bitch.