The media is starting to swarm about Facebook’s dismal effort at their recent Initial Public Offering (IPO) and starting to pick at their return, stock price, and overall performance as a company. I do not want to seem like I am dog-piling on here so let’s get a few things off the table. I do not own any Facebook stock, but I think that Facebook can have value. I think that it has value now. However, I do not think that it has anything near $100B in value by any measurement that I can imagine at this time and there are significant lingering concerns to ponder.
An arguably unbiased method of evaluating a stock price is via Earnings per Share (EPS) and then developing a Price vs. Earnings Ratio (P/E) from it. EPS is, simply stated, the amount of money a company generates divided by the number of ownership shares available. The P/E is the ratio of that amount compared to the price of the stock. The lower the P/E, the greater the potential return on investment.
Google has a higher market cap. If you take the sum total of all of Google’s shares at the current market price it equal just over $200B. But it also has a P/E of about 19 (a bit above average). Facebook’s P/E (even at today’s discounted price) is more than 71, and I would argue that Google’s search/data/advertising model is inherently more valuable than Facebook’s for many reasons … and it is well known that I am no Google fanatic.
Again, Facebook has value. We just won’t know what that is until it starts generating a profit and that profit is compared to its stock price (gosh, I love the free market!).
If we assume that Facebook doubles its earnings per share (EPS) and moves to a valuation on a par with Google’s over the next two years, then the stock may approach $19 per share (current EPS of $0.46 x 2 x Google P/E of 19). If they triple their EPS, then maybe about $26. Notice that to say that Facebook is in any way worth even half of its IPO price it has to double or triple its earning per share when compared to Google. Taking into account future earnings to arrive at a fair share price is a bit complicated, but over the last decade or so, average stock P/Es have ranged between 9 and 17. Notice how Google’s is 19—meaning people think that it is set to outperform the market … and to restate things, Facebook opened for trading with a breathless P/E ratio of 71. The editors at MarketWatch recently guessed that Facebook should be priced at a little over $13 per share—nearly a third of the IPO price.
The key is revenue and finding a way to earn real money without ticking off the customer base (what really doomed MySpace, in my opinion) or violating the privacy protections and rules across countries in all 24 time zones (the United Kingdom and EU Zone is general are getting pretty testy about his topic). Facebook was not able to communicate that they could accomplish this to investors during their road show, to the point where they had to rely on retail investors during the IPO day (rare event).
Growth? Aye … there’s the rub!
Not to beat the issue (though I have been known to do so), but at Facebook, growth is also a big problem. They have two major growth problems:
1. Just about everyone who wants a Facebook page now likely has one. User growth will likely be limited to the following equation:
The number of people being born into internet-ready societies, minus the number who die, plus the people in newly internet-ready places, minus those that descend into Sharia law or other form of totalitarianism.
This is a harsh calculation, but the logic is hard to argue with.
2. By most measure that I am aware of, individual Facebook use is shrinking, not growing, especially in North America. Many people are addicted to their Facebook accounts, no doubt. And I am personally going to link to this blog post from my Facebook page (and from Twitter). But most people—yes, most of the estimated 1 billion Facebook pages—are stagnant, stale, or outright abandoned. Thousands more are commercial pages. Use growth that is occurring is more on mobile devices and no one has figured out how to make real money on smart phone ads … yet. Maybe Facebook will discover the key. And the real wrinkle here is that the mobile use growth is a migration from PC use to mobile app access.
So, to sum up the growth problems:
- Facebook does not currently know where is can find new customers without installing the internet in a small third-world country and quickly college-educating its populace.
- It’s existing users are using the service less over time.
- Existing users are drifting from the semi-profitable pc-based format for the as yet profit sucking hole of mobile access (a trend that everyone thinks will not only continue, but escalate).
Let me give you one more significant problem: their technology is nothing special. Facebook is just a simple Content Management System like WordPress, Blogger, Joomla, etc. The only difference is that with Facebook, you get to force your friends to subscribe to your RSS feed and someone else owns the data and advertising rights. Sure, the “social” aspect of “Likeing” this or that is cool and, these days, darn near ubiquitous. But that is it. The hook is the Like Buttons that appear everywhere and the information that they glean.
I guess all that I am really saying is that Facebook, even in the best-case scenario that I can construct on the back of a napkin, IPO’d twice as high as it should have and they likely need an entirely new business model (and perhaps leadership team) to move forward. I do not know if I am the first to call for Zuckerberg’s leadership of the now publicly traded Facebook to be diminished, but I am certainly early.
Forget about the lawsuits, the pandering movie, the Winkle-twins, the scorned roommate-financier. Forget about all of that stuff. What is Mark Zuckerberg’s contribution to Facebook?
That long pregnant pause is an answer unto itself.
He did not make the interface friendly, did not come up with the original idea, he did not write the code, he has not shown himself to be the visionary and inspiring leader (have you heard him speak and is marketing to under-aged children right?), he is not a business savant of positioning and acquisitions (does anyone think that the Instagram purchase will save them, or the ridiculously conceived Facebook phone?), and he did not foresee the mobile revolution (actually, he appears to have missed it entirely—Facebook’s mobile apps is horrible to this day and they are pretending that mobile doesn’t matter … but it does matter, in deeply meaningful and even mysterious ways). He did learn from MySpace’s abysmal failure and has so far avoided those pitfalls—we have to give him that. But he also has not had to make real money yet either.
Ultimately, all public companies have to make money in amounts that exceed what investors have paid for it. Why else make him a billionaire? It sounds very odd to say it, but what has he really done beside carry around that infamous, inappropriate, and Napoleonic business card? If I am missing something—some nuanced and under-appreciated talent or achievement that I am, in error, neglecting—let me know.
And does anyone get the impression that “The Zuck” cares about the number of zeroes a bit too much? Does anyone else get the impression that the payout is what he is all about? Does it seem very odd to anyone else that he married his girlfriend the day after Facebook went public … because that was “convenient” and in no way should anyone construe that the step up in valuation that occurred on defined pre-marital assets had anything to do with it without back dating options or last year’s valuation estimates, hmmmmm? Can anyone name for me any public company that succeeded long term—say over five years—where the CEO had a similar skill set, contribution, and power/money focus? Forbes magazine is worried that they will not last at all.
Conclusion … get the Zuck out of here
Do not get me wrong. I am an ardent capitalist and no hater of the rich. But again, in my opinion, everything about this IPO smells like day old tuna on a hot summer day and I ain’t buying it. I think that most of the people who own Facebook stock now are, in a word, getting Zucked. My personal conclusions are that Facebook is worth less than half the current stock price and the only chance Facebook has of surviving is with another hand at the helm. Mark Zuckerberg should cash out about ten billion in stock and set aside another ten billion for the new CEO. He should then go and find the next Steve Jobs—toiling away at some company now with a puny equity stake—and capitalize on his talents as the new CEO.
But I do not think that that will happen anytime soon. Those who know me well know that I have been thinking this way for a long time.
Thanks for reading,
Facebook is a trademark of Facebook (FB) and falling fast. Google is a trademark of Google Inc. (GOOG). This article represents the opinion and speculation of the author and no other representations or warranties are expressed or implied … please do not sue me (free speach still lives).