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Facebook's Stockmarket Launch Fizzles Out

Facebook's much hyped stock market launch fell flat. We examine the folly of trying to pass off a social networking fad as a real, monrey making business.

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Facebook's Stockmarket Launch Fizzles Out

by Phil T Luker

An old colleague who is a markets analyst analyst in the City of London, told me last night that Facebook’s shares which shot up as soon as trading in them opened and then almost as quickly fell back because they were implausibly priced given the company does not really have a business plan, relying for income on shoving more and more advertising down users throats and has a ridiculous p / e ratio of 150 : 1 Because of these factors he said, stockbrokers and investment managers were cautioning institutional clients against putting money into a company that could easily become and investment bubble.

Such recommendations came thick and fast less than 24 hours after Facebook’s stock market debut which saw its shares end the day just 23 cents higher than its float price, at $38.23, valuing the company at $104.2bn. What's wrong with that? It's insane, that's what is wrong with it Here's why it is crazy. Normally, an investor would hope to earn at least 5 per cent on an investment – ideally more, since historically, you can earn that just buying Government bonds or plonking your money in a deposit account. So for a company to be worth $104 billion, you would hope for at least $5 billion a year of profit. Really, to justify the risk of owning shares (the value of which can go down as well as up - but more likely down), you'd want more – $10 billion. In perpetuity. Every year. Sine die. Forever.

But Facebook's revenue is currently just $3.7 billion, and its profit is around $500 million per year. So the website is making less than one tenth of the profit you would hope it to earn in the long run

The Facebook launch was hyped beyond reason for months with hysterical tech heads deluding themselves that Facebook's only product, the information it steals from users and sells to advertisers purportedly to enable them to target users with personalised advertising was a money making perpetual motion engine.

Most of the advances in web technology in the past ten years have been driven by the belief that web based advertising would be a bottomless well of money into which anybody with the know how to cobble together a simple HTML page would be able to dip into at will. In fact web users have developed a level of ad - blindness that makes web advertising almost totally ineffective. And with the intrusions into our privacy by companies like Google and Facebook becoming increasingly creepy and offensive that is only going to get worse.

Transaction filings after the market closed on Friday night revealed the extent to which the banks who led Facebook’s initial public offering - in which $16bn of shares were sold to new investors - were forced to move in to the market and buy shares in order to keep the price above the $38 level. Morgan Stanley, Facebook’s lead financial adviser, ended the day with 162m shares, worth $6.16bn. Other banks including JP Morgan and Goldman Sachs also bought shares, ending the day with $3.2bn and $2.4bn holdings respectively.

In short, after stealing $16bn form novice investors, most likely tech heads who believed the hype so it's difficult to have any sympathy for them, Facebook's shares took a massive hit. Quite right too. Zuckerberg and Co are a bunch of dysfunctional arseholes, solipsists who believe the fact that they can do something makes it OK for them to do it. They should have been declared not fit and proper people to run a public company. If competent businessmen had been brought in to oversee the launch it would never have happened.

The ‘sell’ recommendations to investors will make Facebook’s stock market handlers even more nervous ahead of the resumption of trading on New York’s Nasdaq exchange on Monday morning.

“While we like the company, we’re troubled by investors’ perception of the risks,” one investment manager said. “It’s priced for perfection and that’s clearly implausible.”

Well Zuckerberg and his stupid little buddies do not think so and therein lies the problem. These are people who believe that computers think intelligently like humans, that software can me the master of the world and that those who control the information control the past, present and future. In short they are fools besotted by technology. Thus they are doomed to fail.

Despite amassing more than 900m users and tripling its profits to $1bn (632bn pounds) over the last three years, Facebook now faces the challenge of squeezing more advertising from the site without angering the users that are its chief asset. The need that Facebook will have to make further acquisitions, and a still unproven advertising model are two of the reasons why many analysts think Facebook shares are worth just $30 each. In the long run even that is likely to prove unrealistic.

Anybody thinking of putting a sizeable chunk of their hard - earned into Facebook should learn from the MySpace experience. In 2005, Rupert Murdoch made one of his greatest business mistakes: the media mogul bought MySpace for $580 million. Until 2008, MySpace was the world's most visited website, and until 2009, America's, pulling in 70 million unique US users a month. And then all of a sudden, it died, as users fled. Despite being profitable in 2005, by 2010, the website was losing money at a rate of $180 million a year. News Corporation was so desperate to get rid of it that it sold for just $35 million. Now MySpace pootles along just about where a social network should be, irrelevant but mildly amusing for the terminally bored.

The reason why MySpace died was simple: its users migrated to Facebook, which had a cleaner user interface and fewer adverts. What potential investors should learn from this is that Zuckerberg and Co are so arrogant, so afflicted with hubris they do not learn from the past, thus in the belief that users were gullible enough to fall for "targeted ads Facebook have saddled them selves with a user interface that is about as attractive as a dogs arse and a reputation for treating users privacy concerns with contempt.

But let's cut through the Facebook hype. How many of those 900 million usrs are real. Well knock off a third for duplicate and abandoned accounts Then there are so many people like me, we probably count as "regular users", but only log in to check messages once a week maybe.. Because I have websites I use the "share on facebook button" to post notifications of new posts but this is not really logging in. More and more people access Facebook through mobile phone and PDO apps which filter out the ads. Facebook does not give users a blog feature or let them post their creative work, it has never been much more than an electronic address book and photo sharing site. That's why big advertisers, like GM, are reducing their spend on the company.

And who is in control of this revenue-less, glorified address book? A Harvard nerd who is barely out of short trousers and has the most punchable face in the world, whose last big decision was to blow $1 billion on a photo sharing website few people have signed up to because the world needs another photo sharing site like you and I need another hole in our arses. When I say Zuvkerberg is in charge it may come as a shock to many tech - heads to learn that the shares being now sold to investors have no voting rights attached. You may own the shares but Mr. Zuckerberg controls the company and he can do as he pleases with your money. And when Zuckerberg founded his plaything it was not intended to be a business that made money.

Facebook has no valuable real assets, no product to sell or distribution networks which can be sold on should the -ahem, business model - fail. It's nothing but a bunch of servers in California and an egomaniac CEO. And increasingly, it is boring. Even as it spreads to Brazil and China, it's being abandoned by the western college students who made it. Honestly, I would sooner invest in Greek government debt. Or MySpace.

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