May 18, 2012

Selling Facebook Short

First of all, anyone who takes investment advice from me is an idiot. I know less than nothing about investing. If I knew anything, do you think I'd be writing this stinking blog?

Nonetheless, fools rush in...

I am going to boldly make a really dumb prediction which I'm sure I will be eating soon. Later this morning, Facebook will start selling shares to the public. Counter to everyone who knows anything about investing, I think Facebook shares have a good chance of flopping. Not immediately, but soon.

After the IPO hysteria phase is over (and I don't think it will last very long, couple of months maybe) Facebook will be a sell. Here's my logic:

1. I believe Mark Zuckerberg. In a way, I admire the Z-man. He doesn't give a shit about advertisers and he doesn't bother to hide it.

Now that he is going to be a zillionaire, he is likely to care even less about advertisers. He cares about his subscriber's experience, and frankly, I think that's a good thing.

What the hell does he need more money for? I think his psyche is an open book. He'd rather be a rock star than a suit. He'd rather be popular with his groupies than with his investors. I think he made that perfectly obvious in Boston.

Investors want him to sell more advertising. But he doesn't want dopey display ads plastered all over his baby. This will become a problem.

Strangely, by tacitly telling advertisers to screw themselves, he may be instituting a better long-term strategy for Facebook. But in the short term, shareholders are greedy bastards and they want returns on their investment now. Investors could lose patience and start selling pretty quickly.

2.  They still haven't figured it out. As we have said often, Facebook has two options for marketers: the free option (a Facebook page/suite of pages) and the money-making option (paid advertising.)

The free option is interesting. It offers marketers opportunities for creativity and interesting ways to involve consumers.

The paid option is pathetic.

Invisible small space ads tumble down the right side of the page, where most people don't even know they exist. The limits on what you can say in such ads are daunting. The potential for creativity is meager.

These ads have about the same impact as classified ads used to have in newspapers. The difference is, people rummaging through classified ads were actually looking for something. People on Facebook are not.

Facebook still hasn't figured out how to sell its 900 million subscribers to advertisers. If they do, it will become a huge advertising hit. But until they do, I remain skeptical.

The smart money will get in during the frenzy and then get out quickly.

I'm taking my Monopoly money and selling.


Greg Satell said...

You might be right, but one thing I think is astounding about Facebook is that even with their sky-high valuation, the price isn't unreasonable.  

I ran through some numbers last January, when it got valued at $50 billion (I wanted to trash the social media hype in my blog) and found that Facebook was easily worth $50 billion and probably a good deal more.  Then it turned out that my assumptions about revenues and margins were actually too low!

So, while I don't know if FB is a good investment or bad investment at least there is real value there (unlike other companies like Amazon).  

You can check out my numbers and reasoning here:

- Greg

scott nelson said...


Last year, each of the 845
million active Facebook members brought $4.39 in revenue and $1.18 in net income. Even better, based on the $3.9bn
in cash and marketable securities on FB's balance sheet, each of these users
generated a cosy cash input of $1.53 dollars. Based on the projected $100bn
valuation, each Facebooker would carry a value of $118. Keep this
number in mind.


Take LinkedIn: 145 millions users, for a $7.7bn market cap; that's a
value of $57 per user, half a Facebooker. LindkedIn makes $3.5 in revenue
and $0.78 in profit.


Traditional media. Some, like
the New York Times, were put on "deathwatch" by Marc Andreessen three years ago? An approximate
figure of 50 million people worldwide who, one way or the other, are in some
form of regular contact with one of the NYT's brands. Based on today's $1.14bn
market cap, this yields a valuation of $23 per NYT customer, five
times less than Facebook. That's normal, many would say. Except for one
fact: in 2011, each NYT customer brought $46 in revenue, almost 10
times more than Facebook. As for the profit (a meager $56m for the NYT),
each customer brought a little more than a dollar.


Facebook economics appear out
of touch with reality: each customer brings 10 times less than legacy media,
and the market values that customer up to five times more. And when News Corp gets a P/E of 17, Gannett a P/E of 8,
Facebook is preparing to offer shares a multiple of 100 times its earnings and
25 times its revenue.


CRL said...

Good analysis.  Would you do Apple next week?

Greg Satell said...

P/E's can be very misleading (PEG ratios are a bit better) because they don't take into growth into account.  Can FB grow 5-10 time faster than those companies?  Probably.

Despite what many think, a company's value doesn't have allt hat much to do with P/E, it's discounted earnings that count.  P/E is just a convenient way to comparer similar companies and FB doesn't have much to do with News Corp or Gannett.

Atomic Tango said...

Facebook now has a valuation higher than McDonald's, and revenue issues aside (we know McD's makes more than $4.39 per customer), I can see McD's around in 20 years. I can't say if Facebook will make it past the next 10.

Sean Peake said...

Customers are NOT bringing in $4.39 per in revenue. That's what FB generated in ad sales from companies. That's a flawed valuation and combined with a weak CTR on ads, it will be difficult for FB to maintain that revenue per customer you cite, especially with the rapid increase in mobile users compared to Web.

billoukos said...

If we take as granted that the new customer is the "mobile customer" (meaning the customer who is device agnostic and channel specific e.g i can check my mails in my smartphone,tablet,pc,laptop) then yes, Facebook has a huge problem since they havent solved the mobile monetization problem. Throwing banners and sponsored ads in a small screen makes the experience total shit so Zuckenberg will either find a new formula or will end up as myspace.

scott nelson said...

That is exactly the premise of the article Sean, and even with flawed numbers the position is ludicrous.