Friday Facebook became a public company, the first American company to be valued at over $100 billion. That’s BILLION with a B and no Dr. Evil pinky, a market cap higher than McDonalds or Nike for a company that basically sells virtual eyeballs.
Valuation expert Espen Robak, of Pluris Valuation Advisors said this in an interview with The Atlantic:
“If their revenue and profit model stays the same, this valuation doesn’t make any sense. There’s no way they can just squeeze enough plain old ad revenue to justify these numbers. They must change. We don’t know what this is going to look (like).”
As Reuters reported “The IPO price was equivalent to more than 100 times historical earnings, compared with Apple Inc’s 14 times and Google Inc’s 19 times. For many investors that makes it a risky bet.”
The market seemed to take that risk into account ultimately pricing the new stock within pennies of its initial price. Investors who were seeking a first day “pop” were disappointed.
Mashable’s Todd Wasserman wrote of six possible reasons why the Facebook IPO fell flat:
- It was priced just right
- It was NASDAQ’s fault (they famously stumbled the opening)
- Investors are wary of social media stocks
- Retail investors are taking a wait and see attitude
- It’s GM’s fault
- It’s overvalued
People smarter than me can and will harangue over reasons one through four, but reasons five and six really got my attention.
As Wasserman wrote “General Motors landed a well-timed blow against Facebook on Tuesday, when reports surfaced that the company planned to pull all its advertising from Facebook because it wasn’t working.”
Social media expert Gary Vaynerchuk had what was quite possibly the funniest tweet on the GM ad pull “Looks like GM is looking to buy some FB stock on the low” though Ford’s response was perhaps the most cutting: “It’s all about the execution. Our Facebook ads are effective when strategically combined with engaging content & innovation.”
In other words, you suck at advertising, GM.
What really seems germane to me is how will Facebook generate enough revenue to warrant this valuation?
Sure they have the big new $710,000 per day logout ads. Sure they’ve added in sponsored stories and squeezed the commercial elements out of business pages to halt cannibalization. But really, where will this money come from?
Robak thinks he might know, stating in The Atlantic “All the data that Facebook is gathering about us will become valuable at some point. Right now, Google can charge so much more for their advertising because they know what you’re searching for, what you want to click. Facebook can take all of this stuff you write about and turn it into metrics about what you want to buy. I can’t tell you how, but I think that’s the idea.”
And now there will now be the inexorable pressure of shareholders.
Let the profiling begin.