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

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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 10million users and Twitter 780 days. Whilst it has only taken new competitor on the block Google+ just over six months 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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