The recent Facebook IPO has everyone and their mothers buzzing and it seems everyone has their own “matter-of-fact” opinion on the future of Facebook. I personally like the product FB provides, although I must admit I am more of a content consumer than contributer, (I am getting better though) but I am not fond of the valuation on this product. This is not to say I am 100% correct, on the contrary I am writing this post because no one really knows what the future holds, be it stock price or future growth. If you did know you would already be an extremely wealthy individual or in Jail.
With a company such as Facebook there are many intricacies that factor into the valuation equation. There has never been a company with such reach that is built around our daily lives. FB is a platform that connects us to all the people (and now brands) we know. Everyone shares so much through Facebook and with the integration of FB with so much of the internet it is solidifying its extreme importance in our society. FB, in my opinion, will not go the way of MySpace because of how the company has been constructed from the get go, with limited access (ie only select colleges, then only college students) and them growing the brand long before trying to monetize it.
All this aside though a company needs to generate money. You can only play with “monopoly money” for so long. Eventually all us “users” need to lead to dollars, because in addition to satisfying its users and employees FB now has shareholders to answer too. Shareholders have this pesky tendency of eventually demanding cash-flow.
With Facebook trading at something like 100x REVENUE it truly is laughable when compared to a company like Apple trading roughly 13.5X EARNINGS (11.4X projected earnings based on $555 share price) that cranks cash and is growing revenue and earnings at a blistering pace. Now even though this is obviously an extremely optimistic valuation on FB I won’t sit here and say that the price of their stock is only down from the IPO price of $38 a share. (Although the lackluster performance the opening day and the abysmal performance the subsequent trading day prove it was a tad overpriced, at least in the short-term)
The future of Facebook is unwritten so to pretend to know what is going to happen is foolish. From a valuation standpoint it doesn’t make fundamental sense but to those who pretentiously claim, in hindsight, you knew it all along makes me chuckle. This may be the “social media bubble” popping or just forming, who knows?!