A lackluster IPO and crazy valuation are the least of Facebook’s worries
The overhyped Facebook IPO was the thud heard round the high tech world. The stock was overpriced and over allotted by greedy bankers and Facebook executives and, it turns out, Main Street isn’t as dumb as they thought – the stock barely stayed above its offering price on the first day of trading, and that was only because lead banker Morgan Stanley propped it up. After pricing at $38 the night before its May 18 debut, Facebook’s stock zinged to $45 before settling at $38.23 at the market’s close. Since then, it’s been a rollercoaster, mostly heading downward, dropping as low as $25 and change.
The IPO was also an embarrassing spectacle, from CNBC analysts drooling over themselves as they counted down the seconds to the IPO, to Nasdaq CEO Robert Greifeld fist pumping and high fiving with Facebook CEO Mark Zuckerberg as they rang the opening bell remotely from Facebook’s Menlo Park campus (wearing a Facebook T-shirt, no less). And then there were the technical problems: the stock opened 30 minutes late; brokers couldn’t see whether their trades went through or not; and investors, who had oversubscribed believing there would be a shortage of shares, scrambled to cancel or reduce large orders when it became apparent there were more than enough shares to go around. Throughout the chaos, Nasdaq executives
remained silent.
The aftermath of the debacle included accusations that Morgan Stanley told their biggest clients that Facebook’s last-quarter financials were not as solid as previously thought, giving them a heads up retail investors weren’t privy to. While not illegal (shockingly), most people found the move smarmy, further tarnishing the image of a broken IPO system that fell apart during Dot Bomb 1.0 in the late 1990s. The inevitable lawsuits have started flying; other IPOs that had lined up in anticipation of Facebook’s slam dunk came to a standstill; and Silicon Valley venture capitalists began warning other hopeful startups that the days of easy money were likely coming to an end.
As an investor, I wouldn’t touch Facebook with a 10-foot virtual pole purchased on Zynga. First, the stock is extremely expensive. At its IPO price, the market was valuing Facebook at about 65 times consensus 2013 estimated earnings per share. By contrast, Apple is valued at around 10 times and Google at 12 times. Wall Street’s current estimate for Facebook’s 2013 earnings is $0.60, so if Facebook traded at Apple’s and Google’s valuations it would be trading somewhere around $6 a share. But a lackluster IPO and crazy valuation are the least of
Facebook’s worries.
Changing whose world?
“I didn’t create Facebook to make money; I did it to change the world …”
Facebook CEO and newly minted multi-billionaire Mark Zuckerberg is fond of this mantra; however, investors are in it for the money, so he had better figure out how to make lots of cash for more than just himself before those investors realize that the emperor has no hoodie. Already there are some ominous signs: the week of the IPO, General Motor’s announced it would be pulling its $10 million campaign from Facebook because the ads weren’t helping them sell cars, and an April 2011 report by Forrester Research vice president and principal analyst Sucharita Mulpuru called “Will Facebook Ever Drive eCommerce” supports GM’s claim. Mulpuru found that Facebook generates a paltry 1% click-through rate on ads and a 2% conversion rate (which is when a consumer does something the advertiser wants them to, like buy something). By comparison, Mulpuru says all that annoying email marketing flooding your inbox has an 11% click-through rate and a 4% conversion rate. The reason for this, of course, is that people don’t sign into Facebook to shop – they do it to catch up with friends and family or play games.
While his bank account says otherwise, Zuck’s attitude matches his mantra – he only mentions advertising once in the founder’s letter accompanying Facebook’s IPO S-1 filing. In reality, “new media” companies like Facebook are just old media companies like the New York Times wearing lipstick – trendier and hipper, but equally dependent on advertising to stay afloat. So if Zuck doesn’t value his advertisers, that doesn’t bode well
for the future.
Even Steve Jobs couldn’t figure out mobile advertising
In a 2011–2012 survey from marketing agency Greenlight, an astounding 44 percent of Facebook users say they will “never click on sponsored posts or display ads,” while 30 percent of respondents “strongly distrust” Facebook with their personal data – and that’s on desktop computers. With people spending increasingly more time on mobile devices, this presents a huge problem for Facebook. Like older, wiser, richer competitors Google and Apple, the social network has yet to figure out a way to monetize mobile. In fact, in their IPO filing, the company stated that they “do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and [their] ability to do so successfully is unproven.”
Personally, I never click on desktop ads, and the only time I click on mobile ads is when my finger accidentally slips on my iPhone while I’m trying to click on something else. I constantly find myself frustrated as I pinch and push the screen to make it big enough to tap the teensy “X” that closes the ads, most of which are so small I don’t even know what they’re selling. I have no problem with ads in magazines or on TV – I can look or not look and it doesn’t affect my enjoyment of what I’m doing. But I’m not on my smartphone for leisure; I’m on it to get stuff done. Mobile screens are small and already cluttered enough without those invasive little ads creeping across them.
Late Apple cofounder Steve Jobs told biographer Walter Isaacson that he had “finally cracked the Apple TV,” but he never did crack the secret to monetizing mobile. If a marketing genius the likes of Jobs couldn’t figure it out, it’s unlikely Zuck will any time soon. In fact, with Facebook’s lackluster click-through and conversion rates on desktop advertising, it appears he hasn’t even figured out how to monetize that platform effectively.
Zuck’s questionable character
The e-mail Zuckerberg sent to his lawyers asking how to cut cofounder Eduardo Saverin (who renounced his U.S. citizenship to avoid paying taxes) out of Facebook’s financial future by diluting his stake and booting him from the company proves that his “I didn’t do this for money” mantra is either a mixed message or a load of B.S. In the e-mail, Zuck asks if there is a way to get rid of Saverin “without making it painfully apparent to him that he’s being diluted to 10 percent.”
And Saverin is hardly alone when it comes to the people Zuck stepped on as he climbed to the top. The Winklevoss twins sued Facebook and won a $65 million settlement with their claim that they commissioned the fellow Harvard student to program a social networking site they founded called ConnectU, which he promptly ripped off. Sean Parker (Napster) played a big role in pushing out Saverin and shaping Facebook’s success. Parker was also instrumental in cementing Zuck’s czar-like power over the company, and Zuck thanked Parker by using that power to remove him from his role as Facebook’s first president. While none of these guys are sympathetic characters, it appears Zuck is the least sympathetic of them all.
Zuck’s lack of interest in the business side
While Facebook’s shares were sliding to an all-time low on May 29, Zuck was photographed smiling contentedly as he dined at a McDonald’s in Rome, Italy (how too-cool-hacker of him) with his new bride, Priscilla Chan. Pundits made jokes about Zuck mimicking Emperor Nero, who infamously fiddled while Rome burned, but perhaps the person who really got burned is Chan: by waiting until the day after the IPO, Zuck conveniently protected his billions from California’s communal property law. (Again with that mixed message about money.) His resistance to attending most of the events on the IPO road show and his display of disrespect when he did – wearing those slacker hoodies in a room full of potential investors decked out in pinstriped suits – should also concern investors.
The fact that Zuck controls the majority of voting stock and can pretty much do as he pleases (see Instagram deal) is perhaps the biggest red flag that should keep your finger off the “buy” button for the foreseeable future.
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