Wednesday, February 08, 2012

On The Face Of It..

The Facebook IPO is worrying on many levels.

First of all, you just know that it's a bubble - the only question is, will this be a bubble that will continue to rise to stratospheric proportions, or one that will burst sooner rather than later.

The second worrying factor is that this offering will create a (hopefully) benevolent dictatorship - a company where the founder will continue to control the company despite owning the minority of shares. Of course, this has happened before (NewsCrop has a similar share structure and Apple handed similar rights at the second coming of Jobs), but it does devalue other shareholder's capital - it basically says that the shares are actually worth so much that they do not carry any rights. Hardly a democratic or even capitalistic concept.

Then there is the value per user. Each 'active' Facebook user is valued at around $125. When do I get paid ? Or is this the most parasitical business model the world has ever seen ? In 2011 active users generated around $4.50 each in revenues for the firm - and nothing for themselves.

Finally, that valuation. 27x revenue and 100 x earnings if a $100bn market cap is achieved. If earnings double every year, that's the next three years' growth already factored into the price, in my opinion.

Zynga makes up 12% of Facebook's revenue, which is quite a dependency, but is probably a positive since it proves that the platform can grow sizable businesses within its ecosystem - a pre-requisite for any company this size after explosive growth.

So, to invest or not invest? Well, if you get in on the float, you can undoubtedly make a quick buck, but look out for six months in when insiders can sell, and an undisclosed date when the book running by the market makers and underwriters ends.

Google saw stellar early growth and appreciation for shareholders, but quickly hit the buffers. Facebook, I suspect, has a narrower timeframe still for shareholders to make any money, especially since the insiders are taking so much.