By Jon Evans
So Facebook’s IPO was a disaster. Or maybe it wasn’t. Yes, it was an utter fiasco. No, wait: “The debacle was not the IPO but all the whining by speculators who didn’t make money.” Nope, it was “the flop of the decade“, the worst first week of any IPO in years. Au contraire: “What we have here is an investment banker acting ethically. And the whole financial press is atwitter about it.” Nuh-uh: “The IPO discount is the cost of going public.” Yadda, yadda, yadda, ad nauseum.
Why, what with all these furious alarums and excursions and outraged complains, Benchmark Capital’s Bill Gurley was moved to compare Facebook (FB) to another company that immediately dropped below its high-profile IPO issue price and stayed there for weeks and weeks; that well-known loser called … er … Amazon.com (AMZN). You may have heard of it.
Why is anyone paying attention to the this ultimately meaningless pageant? Probably because suckers people used to think tech IPOs were a guaranteed way for those lucky enough to buy at the issue price to make money. Now everyone is shocked — shocked! — that Facebook’s investors may have been treated unequally, and grousing “I’m just extremely skeptical about the ability of a retail purchaser to be able to play on a level field in the market.” Gee, you think? Come on, folks: it’s not like you weren’t warned.
The weird thing is that people actually seem to think that the sinking stock price means Facebook’s prospects are grimmer than they were a few months ago. Now, I can’t stand Facebook — indeed, I’m on record as a regular and frequent Facebook basher myself — but this is nothing but a colossal failure of imagination. Take Henry Blodget’s deconstruction of Facebook’s “natural” value: it’s sharp, it’s incisive, it’s insightful, and it completely misses the point.
Facebook is indeed, as Blodget says, extremely expensive relative to its expected earnings over the next year or two. But, unlike most businesses, Facebook’s long-term upside has nothing to do with its expected earnings over the next year or two. It’s believed by many to be extraordinarily valuable not because of its advertising income but because it has a real chance of becoming a company unlike any that has ever existed before, with the possible exception of pre-breakup AT&T (T).
Look into the medium and long term, something that the stock market is notoriously bad at. In 10-20 years’ time, everyone on the planet has a smartphone, and/or some even smaller and more ubiquitous form of wireless access. We spend more and more time online. Indeed, the whole notion of “online” disappears, as the Internet is woven into literally every facet of our waking life. As this happens, what company defines our identity, and becomes the gateway to every activity and every service?
Yep. Facebook. Sure, Google+ is arguably better, but that doesn’t matter. Bing (MSFT) search is roughly as good as Google’s, but Google (GOOG) won that land grab; similarly, Facebook has won the identity wars. So their advertising income is (relatively speaking) peanuts. Who cares? They don’t need to invent a new form of monetization. They have one already: Facebook Credits. Right now their income from it is a rounding error. But as years go by, and people slowly get accustomed to buying and using and transferring them, and as Facebook grows more and more intertwined with every online action we take – which is to say, nearly every action we take – it could well become the first global virtual currency … and then ultimately lose that “virtual” disclaimer.
Now, to be clear, I don’t actually think this will happen — and I don’t want it to happen, because I think Facebook is a colossal testament to the triumph of lowest-common-denominator homogenizing mediocrity devoid of any real innovation — but I do believe that they’ve got a legitimate shot at it. (Not least because they’re so paranoid that they decided a twelve-person company with no revenue was an existential threat and spent a billion dollars to buy them out. As Andy Grove always says, “only the paranoid survive.”) That longshot long-term possibility, not potential growth in advertising revenue, is what’s baked into Facebook’s more extreme valuations; and that possibility hasn’t diminished because of the IPO. In fact, with billions upon billions of cold hard cash now sitting in Facebook’s war chest, it has if anything grown.