Facebook’s eagerly anticipated IPO, which turned Mark Zuckerberg into a billionaire and a select group of Silicon Valley insiders into millionaires, has had a decidedly rocky debut, to say the least. Shares, which priced at $38 and advanced as high as $42 on the first day of trading, have tumbled out of the gate amidst a long list of potential problems: “embarrassing” glitches on the Nasdaq, investment bankers who priced the deal too high, and concerns from advertisers about Facebook's core business. While Facebook may have been “the last great company of the desktop age,” at $38, it was overvalued for a new mobile age where consumers use the site via smart phones rather than desktops or laptops.
While the Facebook team has floated a number of ideas out there as to how to profit from the mobile era, the company revealed that 85 percent of the company's revenue comes from advertising and 15 percent comes from virtual goods purchased within games like FarmVille and Mafia Wars. Just how reliable are these revenues in the future? At a time when roughly half of Facebook’s users access the social networking site on their mobile devices, the company still doesn’t seem to have figured out advertising in the mobile world. Sure, there was the $1 billion acquisition of Instagram — but didn’t that seem like a last-minute decision by Facebook CEO Mark Zuckerberg to sweeten the IPO honey pot?
Worse yet, even the core of Facebook’s desktop business is open for discussion, as we saw last week when GM gave the big "Unlike" to Facebook's advertising. Zynga and Facebook have openly sparred over who gets all those gaming revenues, while a whole host of other social networking competitors are nipping at Facebook’s heels for its 1 billion users. Presumably, a number of these users would defect if it was made enticing enough. (And, certainly, Google has been doing everything in its power to make Google+ more of a draw.)
At the end of the day, the valuation of a public company on Wall Street is as much a science as an art. While Facebook was talking about users and engagement, Wall Street was talking about dollars and cents. The key to understanding Facebook's valuation is the good old-fashioned multiple, as Business Insider’s Henrey Blodget writes. Which is to say, if Apple is trading at 10-times projected earnings per share in 2013, and Google is trading at 12-times projected earnings per share in 2013, how is it possible, in the real world, that Facebook could be trading at an implied 65-times earnings per share? At $38 per share and a $100 billion valuation, Facebook was worth more than McDonald’s, Amazon, Disney or Visa. Say what you will about McDonald’s, they have a product you can buy called a Big Mac — Facebook has ads for a Big Mac, among other products.
Surely, the disappointing first 48 hours of Facebook’s $38 special will engender a lot of head-scratching and navel-gazing in the tech industry, especially among the tech entrepreneurs in the Billion Dollar Boy's and Girl's Club. At companies such as Twitter, Pinterest and Airbnb there has to be a lot of soul-searching: “Yeah, we can get to 1 billion users, but then what do we do?” Simply racking up a lot of users and trying to sell ads against all those visitors sounds like something out of the first Web boom, when people valued “stickiness” as some kind of financial metric.
Financial markets can sometimes be irrational and overly exuberant, and this looks like a clear case when bankers and others in the money set got a bit carried away with the allure of Facebook’s nearly one billion global users. The next time the likes of Morgan Stanley or Goldman Sachs call them up and offers to take them public, Internet CEOs in Silicon Valley should take a moment to reflect on the example of Facebook. Over the short-term, social networking competitors such as Google will surely indulge in a bit of schadenfreude as they see a worthy competitor take on water in a frothy market.
Disclosure: Washington Post Co. Chairman Donald E. Graham is on Facebook’s board, and The Post markets itself on Facebook.
Dominic Basulto is a digital thinker at Bond Strategy and Influence (formerly called Electric Artists) in New York. Prior to Bond Strategy and Influence, he was the editor of Fortune’s Business Innovation Insider and a founding member of Corante.com, one of the Web’s first blog media companies. He also shares his thoughts on innovation on the Big Think Endless Innovation blog and is working on a new book on innovation called “Endless Innovation, Most Beautiful and Most Wonderful.”
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