Sunday, 20 May 2012

Is Facebook a Bubble?

Friday, finally, after much hype, Facebook was listed on the Nasdaq. After (rather embarrassing) initial technical problems the stock ended where it started: at around $38, its IPO price. Rather disappointing for a much touted tech stock.

The IPO turned many employees in millonaires and multi-millonaires and some into billonaires or even multi-billionaires. And Singapore has one more very rich resident since 2009: co-founder Eduardo Saverin.

Dan Ariely, writer of well known books like The Upside of Irrationality and The Honest Truth About Dishonesty, writes about the fees that Morgan Stanley and the like make on the IPO. He estimates it at $ 660 million of investment bank profits. However, friendly parties who receive the IPO shares might make more money (although with hindsight not that much, since the stock traded only a few dollars above its IPO price).

At $38 the market cap of Facebook is $108 Billion, giving it a PE of about 108. Priced to perfection, not leaving any room for disappointments down the road.

With close to 1 Billion users currently, there is still some growth left. However, in a country like China Facebook is simply barred (Tencent is the leading player), so that is already 1 Billion potential users less. And a country like Japan has its own, highly successful social/gaming websites (GREE and DeNA).

Well known Professor Damodaran finds Facebook overvalued:

I think that the hype is overdone, that disappointment will set in sooner or later and that the stock has far more downside than upside. You can put me in the last group (long term sell) though I am still searching for the most efficient (and least costly) way to execute this.

Facebook, in spite of its ubiquitous presence in our lives, is just one company and not a very big one (at least in terms of revenues and earnings) yet. The market will obsess about it tomorrow but it will move on very quickly to the next worry, fear or fad.  

The New York Times made this graph, to put things in perspective versus previous tech IPO's:

There have been similar companies that faded in history, MySpace comes to mind.

On the other hand, the company is now cash rich, and can use its sky high shares for acquisitions. That is what Cisco did for a long time in the nineties, and got away with its high valuation for many years:

But in the long run the valuation came down and it could not play the acquisition game anymore. People who bought the stock around 2000 and held on to it will not be happy lot.


  1. Seriously I don't fancy IPO. For facebook, if it is a good counter we can buy it at a higher price after a few years. It is still too early to judge that facebook is a viable business. Although I use it everyday but I am not loyal to it if there is anything better than it I will shift. There is no such thing as monopoly in technology counters.

  2. I agree, it is partially unproven. I noticed that e-commerce is doing not so well on Facebook as initially was estimated. Quite a few companies moved away from Facebook advertising, one of the last ones was GM.

  3. it was unfortunate that their underwriter Morgan Stanley had to step in to support the stock price when it fell below the $38 IPO price... this is not seen as favourable to the market even though facebook ended at 23 cent premium...

    whether they will be able to monetise their huge audience base depends solely on what decisions they will make in the future, will they follow google's way of advertising (profit sharing with users)? or youtube's way (mandatory ads view each time you play a video)? we are yet to find out!

    if facebook's only value proposition is being "free", then they may need to rethink their strategy, i'm sure some Chinese are ready to replicate thier version of "facebook" just like how they did to apple!