Why Only Fools Will Buy Shares In Facebook’s Overvalued IPO?

Posted by | Feb. 7, 2012 | 29,871 views

With the recent submission of papers to Nasdaq the Facebook IPO is on. Yet is it really worth a $100 billion valuation? TMV think not. There are numerous reasons to support TMV’s view including, turnover versus profit, the young age of the company and its slowing growth and changing demographic make up and the competitive landscape. However first lets examine the brief decade of social media history.

It is widely agreed that Friendster is acclaimed as the first real social network established circa 2002. MySpace followed in 2004 and reached a peak of just shy of 250 million users at one stage before its slow drawn out decline began. It took Facebook 852 days to reach its first 10 million users and Twitter 780 days. Whilst it has only taken new competitor on the block Google+ just over six months to reach 100 million users.

What do Friendster, MySpace and Facebook all have in common? Their key growth demographic changed drastically from teens and early twenty year olds to the over 45’s and more specifically over 45 women, in Facebook’s case it is over 55-year-old women. Not that TMV have any problem with that. The key is that when this happened to both Friendster and MySpace the kids left in droves. Also where has Bebo gone?

It’s a simple human equation folks, when kids parents are sniffing around the social media space it ceases being a ‘cool’ place where kids want to hang out. It has always been the same in the physical world so why would it be any different in the online social media space?

It took MySpace three years to die its slow death due to this human demographic aspect; it was a lot quicker for Friendster. Interestingly some investors including high-profile artist Justin Timberlake are trying to bring back MySpace from the graveyard of social media. Will it work? It may stay a niche player but that will be it as social media has moved on. Going from 250 million users to under 30 million is quite a fatal wound in anyone’s book.

Moving on now to the key business reasons why Facebook is overvalued;

Firstly, the company is only seven years old, and whilst yes made $1 billion profit on $3.7 billion in revenues in 2011 (according to the Guardian), yet how does $1 billion profit equate to a $100 billion dollar valuation folks? The simple answer is that it does not. Drilling down this IPO is clearly a simple tool for current investors to get some payback before Facebook’s decline into irrelevancy. TMV feel sorry for the brainless idiots who will end up investing now and footing the future loses on behalf of the early investors who are now looking to cash out via this IPO.

Yes whilst Facebook currently has in the region of 850 million users its growth in western markets has slowed considerably over the last twelve months. What makes this worse is that its demographic has dramatically changed and as previously stated this same historical factor led to the demise of earlier social networks.

Facebook has never ever come clean on how many of these 850 million users are inactive and TMV would bet that at a minimum at least 180 million of these are inactive users. Remember that even if you have deleted your profile and photos Facebook is storing the data and in some case stills serving advertisements on those inactive users accounts.

Facebook is a pure-play advertising business it has no other revenue streams to protect it from economic instability, which does affect global advertising spend. Furthermore, its largest growth area is China and India and whilst yes it may pick up the numbers the mean income of the middle classes in those territories is one hundred times lower than that of those in our western economies. Why does this matter? Quite simple if incomes are lower advertising rates are lower to account for that fact. Does it need to be any clearer?

Reinforcing the above is the fact that Sir Martin Sorrell, boss of global marketing company WPP states “you interrupt social conversations with commercial messages at your peril”

The sixty-four tonne gorilla in the room is the massive growth rate of Google+. Reinforcing this is the fact Google has numerous revenue streams across multiple businesses. Google+ plus grew by 50% over December 2011 alone. Facebook even to this very day has never managed such a quick growth rate. Google makes more profit per quarter than Facebook’s total turnover for one year. At current growth rates Google+ will be somewhere between one-third and half the size of Facebook by the end of 2012 in terms of users.

On a final note valuing a company at 100 times its yearly profits assumes that it will make more than 25 years of 50% year on year profits growth. There are bugger all companies in the history of the world to have achieved such a feat and if you analyse the businesses that have achieved such growth, Facebook just does not stand up to the numbers.

We will leave you with a comment left by a reader on Nils Pratley’s post within the Guardian’s Finance blog; “100bn FFS? Facebook is a sorry tale of trivia and pictures of fluffy kittens, a great way to find out that your £mates are going for a curry or what your old school chums did last night. Oh, and holiday pictures galore. If he can sell this human shout box for his asking price there must be no end of folk who refused to look that gift horse in the gob, forgot to check the poke for pigs and can’t tell shit from shinola. Fools rush in where angels fear to tread.”

Please do leave us with your thoughts, as a TMV reader is FB really worth £100 billion?

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Posted by on Feb 7 2012. Filed under Digital, featured. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.

7 Comments for “Why Only Fools Will Buy Shares In Facebook’s Overvalued IPO?”

  1. Darrel

    I personally have 3 facebook accounts that I created for games that I no longer play. One game I played (Battle Pirates) is full of players with multiple accounts. One fellow that was in my sector uses 5 FB accounts to play the game, but it is hard to get people to admit these things because they risk being banned from the game. I also know that younger people use multiple accounts to keep their parents out of their lives. I question the actual real number of users.

    And for Pete, the last time I clicked on a FB ad was to play a game, for free. Google and Ebay are for shopping, FB is for narcissists and is only contributing to the downfall of civilization.

    Now I must go back to FB and refresh until I get a like on a new photo of mine.

  2. Pete

    Facebook ads are mostly from small local businesses which often use the pay per click method. I myself spent 1k on Facebook ads which result in my ads being click on 20 times out of 50000 people who view it. My company build custom computer for gaming and other high performance use. We was having a sale for $350 for a quad core 3.6ghz desktop. We chose the right age group and male who has interest in gaming, computer and technology. Out of all the clicks I didn’t make one single sale yet most of my sale comes from google ad. So it doesn’t matter if someone put that he likes gaming, computer, technology on his Facebook that doesn’t mean he is looking to buy a pc. If someone or even yourself wants to buy a pc you would “google” cheap gaming pc. The intent to search is the will to buy. Ask yourself this, when was the last time you click on a Facebook ad? Do you click it often to make your Facebook account worth around $100, if Facebook is value at $100b? Plus, next time when you are looking to buy a new tv, are you going to log into your Facebook and keep refreshing until you see a good deal on a tv or would you rather “google” your search to see all the different prices and offer. In conclusion, People use google for important stuff and Facebook to kill time.

  3. JF

    Jakomi,

    While I agree with you the FBs IPO is going to be grossly overvalued, I do not think that there is any chance that FB will not continue to be a major social networking player for many years to come. First, with an 850 million person user base, most users, especially the majority of older ones, are fully invested in their accounts. People in their 40s and up do not shift readily. Second, FBs bells and whistles mean little to those users. Most adults use it to reconnect and stay in touch with their friends, not to be cool. For that, FB remains amazingly simple, although some of the recent changes, especially Timeline, have definitely confused less tech savvy users. Third, the data that FB collects has more depth than almost any other web service. They will figure out how to mine it in a way that makes FB’s individual ads more valuable than Google’s. Finally, FB may also move into generating its own FB apps, including games. That is, potentially, a major source of income

    IPOs are valued not just on current earnings, but on projected future earnings. Within five years, FB should be generating $3-4 billion in annual profits. So what is the true value of FB? At an earnings multiple of 12x, pretty standard for large Internet companies, that would make FB worth somewhere in the $35-50 billion range.

  4. MySpace is still in the top 10 Social networking sites, beating out Google+, according to Nielsen:
    http://blog.nielsen.com/nielsenwire/online_mobile/nielsens-tops-of-2011-digital/
    (Scroll down to the chart were MySpace is mentioned.)

    MySpace is #16 on Seomoz:
    http://www.seomoz.org/top500

    And is in the Top 7 trending brands on Twitter:
    http://thenextweb.com/twitter/2012/01/10/the-top-15-trending-brands-on-twitter-according-to-hootsuite-infographic/

    According to Google’s own stats, MySpace is still in the top 100 sites worldwide, ahead of Tumblr & HuffPo. Surprisingly, Reddit is nowhere in sight:
    http://www.google.com/adplanner/static/top1000/
    Just looking at that list and counting Social networking sites, MySpace comes in at number 5.

    And it’s still beating out Tumblr & Google+ according to CommScore:
    http://www.techradar.com/news/internet/myspace-more-unique-visitors-than-google-and-tumblr-1054456#form-wrap-commentform

    MySpace TV is also mentioned postively in these articles:
    http://venturebeat.com/2012/01/18/the-view-from-ces-the-top-trends-in-technology-for-2012/
    http://www.v-net.tv/myspace-unveils-soctv-and-second-screen-sync/

  5. Dear lalawak…we seem to have rattled you with our post. Pitty people like you can be so rather groteste but are to afraid to leave a real name and email address. But if that is level your coming from perhaps it just shows that some fb lovers have no real arguments to support such an overvaluation?

    On a final note the post does not just mention growth figures of Google+ vs FB it mentions many other factors which leads me to believe you are a complete ludite – bet you do not even know what word means…

  6. lakawak

    The easiest way to know if someone is worth debating with is if they try to bring up the time it took Facebook to reach a certain number of users compared to Google+. If they do that, they are clueless jokes.

    As for your predcition that Google+ will have 1/3 to 1/2 of Facebooks users by the end of hte year..WOW! What a COMPLETE joke you are. Even Larry Page would first laugh in your face, and then piss in your mouth at how stupid that statement is.

    If you think that Google is NOt scared shitless about Facebook, you need to seriously kill yourself. But first, kill your parents. Make sure they can’t POSSIBLE fuck up another child as much as they did in raising you to be so completely delusional and unprepared for reality.

  7. RSL

    As someone who has spent 7 figures on the ad platform I can say beyond a shadow of a doubt that people underestimate the value of their platform until they make some money with it. Sure, it’s primarily an ad based platform, but the real power of Facebook is going to be seen once they release their new products which expand their reach (potential ad impressions) across the web.

    Combine this new reach with their stellar ad targeting an you will see a lot of companies like mine increase their spend from 7 figures to 8 figures easily.

    Don’t let the whole social network aspect of it fool you, that’s not the important part, it’s just an ingenius way for them to get the data that makes it a superior advertising platform. If you consider the fact that everyone in the world has a Facebook account, well, think about what I said a few lines ago and then think about what’s coming. If you are in the LA area and you ever want to see what I mean just shoot me a line. Lunch is on me.

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