May 30, 2012
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Facebook IPO Flop
“They misjudged what the real demand was,” Quinten Stevens, chief investment officer at Stevens Asset Management, told CNBC, referring to the underwriting banks on the deal.
This isn’t rocket science. Facebook has no physical product. Its highest tier of revenue comes from questionable companies that exploit the ability to charge cell phones of kids who don’t know what they’re buying. This has all been pretty well documented for years; it’s not a sustainable business model.
You could argue that, say, Google has no physical product – except that the Android is actually a huge part of their revenue; it’s projected to generate 1.3 billion dollars in 2012. Obviously a brand name is important, but just as obviously, you need to use that brand name to sell a product for which you can get paid.
I can’t believe that this is being treated like some kind of esoteric wisdom that the CEOs of $100bn companies are incapable of grasping.
Comments (9)
I think they make a lot of their money from advertising. And Facebook’s advertising just isn’t that good, I’ve heard.
lol
I never even recommend advertising on Facebook for clients lol. Advertising, as a method of promotion, has iffy returns and just because a company has great demographic advertising potential–segments of markets are not always neatly placed into demographic models. And I find it ridiculous that so many businesses are on Facebook and begging for “likes”–as if the popularity will reach new customers and stay in existing customer’s lives. And so many companies promise “SMO” for businesses and make a shitload of money on it. I’d like to see some real data on the returns of that bullshit.
http://www.forbes.com/sites/bruceupbin/2012/05/30/facebooks-value-is-not-in-advertising-its-in-commerce/
Not trying to start an argument, just checking facts and validity.
Google’s 2011 annual revenue (as reported in their 10k) was $37.9b, so for the purpose of this discussion let’s assume revenue remains unchanged in 2012. With that assumption, the $1.3b in revenue generated from sales of Androids is roughly 3.4% of Google’s annual revenue. That is not huge. And if Google’s revenue in 2012 actually does increase (as it likely will), then this percentage will be even smaller.
Intangible assets are real. How can anyone deny that facebook has value?
Businesses don’t need any physical product. Many businesses are service oriented. FB does that through ad sharing with businesses. Ads make up a huge market that FB can take advantage of in a very unique way. The real question is whether or not they can capitalize on that advertising model that is rather undefined at this time.
How do law firms, banks and consulting companies have stock when all they have are lawyers practicing law, vaults to keep your monies and talented people to keep other companies in business?
Services. You could say Facebook is a form of service… it’s unprecedented, but I’m sure they’ll create its own category.
@tjordanm - Indeed. I think many forget that traffic does not equal business being done. People may or may not go to your site due to Facebook ads or optimization, but even if they do, that doesn’t get you anything if they don’t buy. Thanks for sharing your perspective.
@light_blue_fables - Thanks for bringing up the numbers. I did some looking around. Forbes (and the article I linked) uses Munster’s estimate that each Android unit is bringing in about 5.90, but Horace Dediu has an estimate that puts it at 8.33 per unit, 40% more. That puts them within striking range of their goal to get $10 per unit. That said, even 2.5bn would be only 6% of their total revenue, so I will agree that I should not say it is a “huge part” of Google revenue. Back on topic, it would have really mattered for Facebook if they had done it, though: FB’s revenue was 4 billion in 2011, and 1-2bn would be a huge part of that.
I don’t deny that Facebook has any value. You’re really over-exaggerating my point. Rather, FB didn’t leverage its name brand the way google did, and on top of their ad revenue issues, that isn’t a good sign. Intangible assets may have value, but that value is more susceptible to fluctuation. Remember MySpace? It originally sold for 13 billion, but recently sold for 35 million. Such a disparity indicates the methods used to value it initially were not good. If they had actual physical assets and physical products, I don’t think it would have been so easy for them to fall so far.
We are now seeing that FB wasn’t worth $100bn, and my assertion is that this shouldn’t have been impossible for trained analysts to deduce.
@bryangoodrich - The TechCrunch articles are about how 15-19% of FB ad revenue is related to disreputable companies willing to pay several times more than the normal market ad rate, and therefore probably not sustainable. Even the Forbes article that light_blue_fables links, which is pretty rosy about Facebook, acknowledges that ad revenue is not going to cut it. I agree with you that not every business needs a physical product. However I must ask, of the businesses that are worth over $100bn, how many are entirely virtual social networks and the like? Every $100bn+ service company I can think of does financial services.
@StupidSystemus - I’m not saying it can’t be done at all, only that it isn’t surprising that FB isn’t worth $100bn. In fact your point that they can create value in new ways can also be used to say that they need to do so (which is what Forbes argues), and until then valuing them at 100bn is probably premature. That word you used, “unprecedented,” should call for a more conservative valuation.
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