Friday, February 03, 2012

Facebook IPO - Hype vs Long Term Success

The biggest news this week is Facebook's IPO. The valuation is expected to be anything between $75 billion to $100 billion

The IPO is guaranteed to be a success - all the investors are going to be sucked into the hype and almost forced into buying a chunk of the company. There is no stock as sexy as Facebook. It is indeed going to make a number of people associated with Facebook multi-millioniares. The likes of Mark Zuckerberg, Peter Thiel, deserve all the windfall.
But is it going to be a long term success?

1. Google vs Facebook

At $75 billion, Facebook would be worth about 40 percent of Google — a company that has profits about 11 times Facebook's
I think people err considerably in putting Facebook and Google in the same category. Google has significantly diverse product mix with varied and robust revenue streams - look at youtube, google AdWords, Blogger, Gmail, Google Shopping, not to forgot Google Search itself.
Facebook revenues are primarily dependent on you logging onto a single webpage- Facebook. Just no comparison!!

2. Compare the Market.com

* At £75 billion and 2000 employees, Facebook is worth as much as Boeing, an almost 100 years and 160000 employee strong company.

* At £75 billon , it is only 1/5th the size of Apple. The Apple!! A global giant with outstanding path breaking products, record breaking revenue growth, and the most loyal fan base ever.

The loyalty with Apple products is based on the excellence of the products - physical. Loyalty to Facebook is dependent on other users - ephemeral.


3. Stock Price based on WHAT?

Investors are going after facebook based on pure speculation. Facebook itself doesn't have years and years of guaranteed returns. It was founded just 8 years ago. All the valuation parameters (not all favorable to Facebook anyway) are not tried and tested. There are no firms in the class to compare Facebook's valuation against. Things are really dynamic in the online world - behaviours are changing rapidly, competition is fierce, and privacy and censorship are only likely to get stricter.

3. Growth will stagnate

Facebook is primarily based on adding new users. Already, in US and UK, it's user base is growing more slowly. The same will happen in other parts (migration of Indians from Orkut to Facebook is almost complete). It has zero penetration in China, and given Google's problems there, it is unlikely to make substantial inroads.

4. Popularity is a whore

Facebook's fortunes hinge on popular sentiment. If you believe FB is where it's at, you will invest your time (through your user account) and your money (through your bank account) in it. If the perception turns against it, users and investors will desert it in droves. Facebook will be stripped bare of all its value.

So, the IPO is a definite success. But will Facebook be a long-term success. Probably not!
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