Facebook - is it a case of the tide turning or Emperor's new clothes?

Facebook was supposed to be big the IPO of the year. As of writing its shares are down 20%. My impression pre-float was it was being presented as a sure thing. What went wrong? Has the tide turned? Is it a case of the proverbial Emperor’s new clothes and was it hype all along...
I almost feel sorry for Mark Zuckerberg following the news on facebook over the last couple of weeks. There he was his company had been feted and prep’d by walls street’s finest for the float of the year. He had just got married. Now look at things, facebook has steadily dropped and is currently trading 20% below IPO. He has been on a roller-coaster of a ride.

So where do things stand. First the share price. Yes it is down 20%, but it is worth remembering it did rise initially - up to 13%. Then there was the technical glitches at NASDAQ which may either have triggered a hiccup or exacerbated the fall. In overall terms, equity markets have also been falling across most of the world So the timing and circumstances have been very unlucky for facebook and Zuckerberg.

At todays prices, facebook is still trading on approx 60 times earnings (down from around 100). It is a huge premium by any standards. The question is - does facebook still have the potential people believed it to have?

Cards on the table: I am a bit of a sceptic when it comes to social networks. Its not that I don’t use them - I do. I just don’t see them replacing traditional friendships or the need for humans to meet and socialise face to face or even to replace the telephone. I am especially sceptical when it comes to driving business from them. This is the issue that people may start to consider when they now look at facebook. Yes it has all these users (900 million of them) but how will facebook (and its business customers) make money from them...?

facebook and Advertising

A few things to consider:
  • Just because facebook is the largest social network platform does this mean it is bound to be a good business?
  • You have seen a facebook advert I suspect. But have you ever clicked on one? You may have heard that just prior to the IPO it came out that General Motors who spent $10m on facebook advertising last year have stopped spending - because they said it did not work... Research done in the US by Ad Consultancy Wordstorm looked into facebook Ad click-throughs - they averaged just 0.05%. Now compare that to Google’s at 0.4%. Google is close to 10x more effective per advert than facebook.
  • Ever used your mobile for facebook? You don’t see many ads on mobile sites - the screen space is too small. However facebook users are increasingly accessing it from their mobiles. Just how will facebook make advertising revenue form mobile usage given there is almost no space to display ads?
  • facebook is not currently a contender in the world’s single largest internet market. Yes that right - it does not even figure. Bit surprised? Well the worlds largest internet market is actually China which has close to 500m internet users and growing fast. facebook does not really operate in China - the local equivalent is called Renren. Hummm ...
  • I mentioned Google above. In advertising terms Google is regarded as facebooks big competitor. Consider the advertising proposition between the two: facebook serves ads based on your characteristics such as demographics and interests that you have that they are aware of. Google on the other hand predominantly serves you ads when you are looking for something and when you are looking for the solution to problems. No wonder Google is almost 10x more effective per ad. It’s search platform serves adverts in response to what you are looking for - duh!? Its not easy for facebook to compete with that.

So what is the future for facebook?

I think the company is not out of the storm by a long way. It may even end up being another mysapce, friendsreunited or lastminute.com. Remember them. They are not exactly all dead and buried but they are by no means the giants they were once forecasted to be. The internet has seen many giants cut down to size - and quickly. Will facebook be different?

Well it does badly need to establish a solid business model. Their Ad spend growth at 45% sounds good but it is half of what it was and may be still dropping. The current business model which sees facebook as essentially a web advertiser severely tests a $100bn valuation. Mobile is also big threat revenue-wise as it does not lend itself to Ads unless of course they have something really clever coming out that we have not seen yet.

Then there are also the up and coming competitors that are nibbling at its heels. Renren in China is well established in the biggest single internet market and still growing. There is Tumblr on blogging, Pinterest (both menioned in our last posts - Blogging how to set one up) and of course Twitter. The question asked above was: does facebook still have the potential people believed it to have? I think confidence has taken a big knock, their valuation and indeed their business is buoyed on sentiment. If this dissipates and there is not a strong underlying business model then it will at best be a shadow of what it was once forecast to be.