So now that the hype of Facebook as a major web investment has passed and we are all carrying on with life. The tech community and wall street are in a stand off on the value of one of the highest valued web properties in the history of the web. On one hand you have an innovative web property with over 900 million users. On the other hand it’s just an ad-revenue based website that can’t quite monetize the mobile market.
For full disclosure, I am not particularly a fan of Facebook or sites like them. I think too many users freely give information to these sites with the expectation that only their approved friends will see them without thinking about the impact of Facebook’s position in the relationship. Many users of Facebook agree with me and simply use it as a tool to connect to their more fanatically Facebook oriented friends. I will try my best to be level about my judgement of this situation and then give my opinion at the end.
Facebook has caught a wave of luck and timing. First to be able to build a once isolated social website for University students and with a clean and simple user interface that people just got. Once they closed down the university student requirement, their existing user base did an excellent job of pulling in others to the site. There are very important things that I feel Facebook understands. One is that popularity of the user base is important to Facebook’s success and the user interface. No one really cares what goes on outside of that. As long as it is intuitive and pleasant as a web experience, people will keep coming back. These eyeballs have value for Facebook. However, I think that what has plagued many marketing companies is the dollar amount for that value. After all, an ad view or click is only worth anything if a user takes action and buys a product or service.
Facebook’s IPO valued it at over $100 billion. That’s a lot of money for a website that just last year only made $1 billion. This has created a P/E of 99. That is astronomical. For my less financially savvy friends, that is the Price vs Earnings index. You typically want this value as low as possible. Google’s P/E is 18 at the time of this writing. Kraft Foods, which is a very strong company, has a P/E of 19 at the time of this writing. So we could look at the P/E as a determiner to how expensive a stock really is. Sure you see the stock value at $30 and think, wow that is affordable, but the stock only reflects a certain percentage of ownership.
Since Zuckerburg is holding control of Facebook with 57% of the voting rights that value is extremely low. There are somewhere around 2.14 billion shares of Facebook. That’s really high. That means that just one share is just 1/2.14 billionths of the company. Just for reference there are only 326 million shares of Google, which is why that stock’s face value is so high. So when you buy one share of KFT or GOOG over FB, you actually buy a bigger share of the overall pool of stock available for that company. So now that you understand the value of stock, you might be thinking that Facebook, according to it’s P/E, is only worth a quarter or a fifth of it’s IPO value. This is probably a wiser line of thinking for a long term investor.
If Facebook’s revenue doesn’t improve to show value to the institutional investor, the stock price might go down as far as $7 per share before it starts to finally plateau. I personally don’t think that will happen given that it is a new market and people love the idea of Facebook. I would guess that the value would level off more in the low $20. A lot of people want to put blame on the NASDAQ for it’s failures the morning of the IPO but I personally think the stock would have had the same losses regardless. The realities of the value and the IPO deal make it clear that this was an exit strategy for pre-IPO investors.
I do think that Facebook can monetize it’s user base better. By utilizing smarter advertising targeting and capturing value on viral activity within their community. They have attempted to capture buzz words in status updates in the past, like if a user is talking about Coke to hyperlink Coke to an ad or like page for Coke. Utilizing strengths in viral marketing are largely the next step. However after being in this business for a while I understand the challenges. You have institutional marketing that tends to be slower to understand the changing landscape of internet media and how to monetize it. Getting traditional marketers to understand what they are leveraging is a challenge. There is also the new ability of interactivity. The other challenge is the end user. People can get tired of ads and those ads present a stopping block to usage. Worse when the targeting is done incorrectly and a user gets an ad that either is irrelevant or goes against their morals or ethics and concerns them. Users are fickle and Facebook is not hard to duplicate. We all remember MySpace right? That loss of connection with what was important to the end user was devastating to MySpace.
Having said that one might think that Facebook is in a strong position but in actuality they have a lot to lose at this point. This is a concern to investors. Who wants to be Rupert Murdoch holding a property that you paid over $500 million for only to sell it a few years later for $35 million? So Facebook has to shake off the view that it is a fad or that it can be easily run aground by a better competitor. Facebook’s Facebook if you will.
There is also the problem of monetizing mobile platforms. Facebook has largely left this untouched and for good reason. The user experience. A clean and understandable interface is key to Facebook’s growth and mobile ads tend to not align well with clean nor friendly. Many mobile ads attempt to illicit and entrap. This is the next big challenge. Getting old internet marketeers to not utilize ads to trick or illicit an action. While it may dupe naive users to go to your page and even purchase a product or service. It seriously degrades the perceived value. Walking the fine line of intelligent advertising and keeping the experience exciting for the user is one of Facebook’s biggest challenges going forward.
For full disclosure I am not a stock analyst nor do I own stock or property in Facebook or it’s competitors. I have only 2 years of experience in heavy trading in the stock market. So take what I say with a grain of salt.