The Facebook float has become something of a phenomenon. Demand for the stock has been so strong that its promoters have raised the price range for the IPO from levels that already had sophisticated technology investors scratching their heads.
With reports that the Asian tranche of the offering already over-subscribed 25 times, and US newspaper reports of 11-year-olds wanting a piece of the action, there is a sense that the float has become more of a social event, one with cultish undertones, than an IPO.
The original plan was to sell about 10% of the company to new investors at a price of between $US28 and $US35 a share, valuing Facebook at between about $US77 billion and $US96 billion. Yesterday the range was shifted upward and narrowed to between $US34 and $US38 a share, lifting the valuation to between $US93 billion and $US104 billion. The listing will now raise about $US12 billion.
That’s clearly a response to demand rather than fundamentals. Facebook’s first quarter results showed revenues and earnings actually falling relative to its fourth quarter numbers last year. While the company cited seasonality, a stock valued with the levels of growth that the Facebook IPO numbers imply shouldn’t be materially affected by seasonality.
There are other disconcerting trends within its business. Even as its numbers of users, and its advertising revenues have grown — it has about 900 million users and had $US3.7 billion of revenue and $US1 billion of earnings last year — the growth in its revenues per user has slowed and its margins have been shrinking. That’s partly a function of its size — it has grown such a large user base so quickly that it can’t grow its advertising base fast enough to keep up with them — but there is a structural element to it to.
More than half Facebook’s users access through its mobile application and Facebook itself has conceded openly that it hasn’t yet worked out how to monetise that mobile usage. Unless it can crack that conundrum, the continuing surge in mobile usage will undermine its economics.
It has been trying to beef up its mobiles expertise and understanding through a series of acquisitions, most notably the $US1 billion it spent recently to acquire the mobile photo-sharing app group, Instagram. Instagram is popular, but essentially has no revenue. A reality is that smartphones aren’t great vehicles for conventional advertising. Another potential issue, unless Facebook can devise ways to increase its revenues per user, is the network’s sheer size. It appears inevitable that it will have more than one billion users soon. Given the number of internet users worldwide is estimated at about two billion, there is a ceiling on its eventual size.
If Facebook is to justify the heady price-tag being placed on it, it will need to get better yields from the advertising that generates almost all its revenue, which means it has to better exploit the extraordinarily deep user engagement and the user data it holds to enable advertisers to target their advertising.
That is a very sensitive issue, however, given the existing concerns about Facebook’s attitude towards its users’ privacy. Facebook isn’t the only social network out there and the MySpace experience illustrates how quickly and destructively a social network can fall out of fashion, although Facebook is enmeshed deeply into its users’ lives.
The other reason to be sceptical about the valuations being placed on the group is that Mark Zuckerberg has made it very clear that he is more interested in improving the user experience than in building earnings and he will retain control of the group. There is no reason to disbelieve him, which means that it is likely that he will continue to build Facebook’s cost base regardless of whether it translates into greater revenue and margin growth. In a listed company, that’s a recipe for tension between management and the market.
Facebook is, in terms of a business, obviously immature, with a crude revenue model. That suggests there could be significant upside if and when Zuckerberg and his team focus more attention on the commercial potential of the remarkable platform he has built. Once listed, he is going to have to do that quite quickly and creatively — whether he likes it or not — because otherwise Facebook is definitely not going to be worth more than $US100 billion, at least not for long.
*This article was originally published at Business Spectator
Perhaps data mining for governments may be a more lucrative revenue stream than advertising.
Here’s a thought. Someone is going to get very rich and lots more people will be left with a dog. A sick dog at that.
The success of Facebook seems to be a given but there are other social networking sites out there, some very well backed. Compared to Facebook they’ve just failed. I doubt their a particular reason wasn’t related to usability or quality or stuff like that. It’s just because people like Facebook better, just like I like girls with dark hair. No reason, just ’cause. Whatever the reason, Facebook and it’s investors shouldn’t believe everything is inevitably blue sky.
Wikipedia tells me that Facebook began in 2004. It’s user growth has been simply extraordinary and is currently headed for 1000 million users. But when you look at the trend of growth in user numbers it is apparent that after very fast initial growth, the rate of growth has slowed to 1.74% per month (down from a peak of of 178% in August 2008 or one hundredth the rate) so it seems that peak usage is close.
Secondly, people have very short memories. Facebook’s huge growth occured in a very short time. If trends of the last thirty years are anything to go by, a new product that will better engage users is just around the corner. I have no idea what that product will be, where it will come from or what it will look like but I’ll guess that when it comes along it will stop Facebook’s growth dead. Even if it doesn’t take customers away from Facebook, new customers will see Facebook as as old and stale as my 15 year old sees email and landlines.
Still the trick is getting out before that happens. 1.74% per month is still 20% per year or something like 200 million new users per year and that’s likely to earn someone more money that I can reasonably imagine. One tiny wrinkle however is I don’t know and can’t find out how many inactive users there are and this would seem to be a key metric.
Will it stay afloat?. No. Fluffy air is being sold. Pity the fools at the end of the bubble.
It’s also just a matter of time before advertisers realise few people click on their adverts and even fewer Facebook members actually read Facebook.
Skoolkids locked in their bedrooms yakking to friends are not an audience.
It’s anothe rexample of the media doing the dream weaver’s job for them.