Unless you have been living under a rock over the past few months you are well aware of Face book's highly publicized IPO starting at a market cap of close to $100 billion. Since FB started trading last Friday at $42 the stock has done nothing but go down and incur loses for early investors; will it turn around?
Before I answer that question let's look at some of the other factors that play an important role in this massive IPO. Prior to the IPO many investors were comparing Facebook to Google, surmising that the Facebook IPO could be bigger and more successful then Google was. It does not take much research or much looking to realize that Google IPO was a whole different ball game and one cannot compare Facebook IPO to the Google IPO. Google IPO at a market valuation of around $24 billion and started trading around $85 per share (a 50% cut from the expected IPO price) so it's difficult to compare it to the bloated $90 billion Facebook IPO price. When Google IPO it was in a different time, the market was oversold and Google's pay per click revenues were exploding. Starting with a $24 billion valuation Google had plenty of room to move up. Not so with Facebook.
In 2011 Facebook had around $1 billion in net income on revenues of $3.7 billion. Do these numbers really justify a $70 billion valuation? (At the current price of $32 with 2.1 billion shares, Facebook has a valuation of around $70 billion) We don't think so.
It is important to note that GM just pulled all their advertising from Facebook; they mirrored when many advertisers on Facebook are starting to realize. Advertising on Facebook is like advertising on the walls of a wild party. Sure your adverts are up but nobody is reading them.
The internet is changing very quickly and what is popular now may not necessarily be popular in 10 years. Will 12 years olds be using Facebook in 10 years from now? Or maybe by that time a new craze will have come along? We think that is the likely scenario; Facebook was the cool place to be but we believe it's just a fad, in a few years, something better will come along and kids will forget Facebook just as fast as they discovered it.
Let's hope Facebook spends this windfall from the IPO well and diversifies because the current business model will not support a $70 billion valuation for long, much less provide enough value for investors to start buying up shares again.
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