What is there to say about Facebook?
Why would anyone buy a company’s stock when they have no real profit pedigree? When their advertising profit in 2011 came to just over $1 billion, and their book value is the region of $100 billion, how can that really make any sense other than to the kind of nutcase zombie trader who takes Jim Cramer seriously? The sad truth is that people are just not clicking the ads; Facebook ads receive far fewer clicks than competitors such as Google’s AdSense.
If Facebook was floating with a book value of $5-10 billion (or around $2-4 per share) we would be talking about a serious business proposition, albeit one which is already rather saturated (given that there are 2.3 billion internet users, and Facebook already has its claws into 900 million of them). But at these levels? What are people paying for?
Some say the name recognition and momentum (but that’s just paying for hype) as well as the infrastructure and data that Facebook owns. Certainly five or six years of a big chunk of humanity’s likes and dislikes is a valuable database. But how do they monetise that? Does Zuckerberg have any credible plan?
The most under-reported piece of news of the day is surely that Zuckerberg does seem to have a plan. But it’s not very credible.
From the BBC:
Facebook has started testing a system that lets users pay to highlight or promote posts.
By paying a small fee users can ensure that information they post on the social network is more visible to friends, family and colleagues.
The tests are being carried out among the social network’s users in New Zealand.
Facebook said the goal was to see if users were interested in paying to flag up their information.
That’s their plan? That’s Zuckerberg’s big idea? Get users to pay to post premium content!? Did the well-circulated hoax that Facebook planned to get users to pay for use just turn out to be true? If they proceed with this (unlikely) it seems fairly obvious the world would say goodbye Facebook, hello free alternatives.
The truth is that Facebook is a toy, a dreamworld, a figment of the imagination. Zuckerberg wanted to make the world a more connected place (and build a huge database of personal preferences), and he succeeded thanks to a huge slathering of venture capital. That’s an accomplishment, but it’s not a business. While the angel investors and college-dorm engineers will feel gratified at paper gains, it is becoming hard to ignore that there is no great profit engine under the venture. In fact, the big money coming into Facebook just seems to be money from new investors — they raised eighteen times as much in their flotation yesterday as they did in a whole year of advertising revenue. For an established company with such huge market penetration, they’re veering dangerously close to Bernie Madoff’s business model.
On the other hand, they have plenty of time and money to try out various profit-making schemes. Eventually, they may hit on something big; Apple didn’t start out producing huge cashflow or sales, they got there the hard way. But it all seems like a big gamble on an outfit with big dreams but little moneymaking pedigree. I’d consider buying Facebook at $2-4 a share. But current valuations are a joke — and I don’t think the market is falling for it.
Even the NYT notes:
The company’s bankers had to buy shares to keep the stock from falling below its offering price, raising questions about how the stock will fare next week.
azizonomics 
IMO it’s bloated way out of proportion. Assets that are hard to duplicate like great organization of servers etc (no downtimes ever, always smooth service) are nowhere near this kind of value. 900mln users may always just swap for another player. I’ve seen some advertisements spammed by my friends that just got some job and were supposed to do “viral advertising”… none of them were relevant to me and even if they were, I would never consider choosing some service, because a friend put it on his wall. It does not facilitate personal advertisement. Your friend can as well use it to say good stuff about a pub that pays fb for advertising and about one that does not!
These paid comments seem to be a bad idea. I’m in fact target audience for sth like this. I’m provoking discussions to put my views across to people over fb. But I would never pay for highlighting it. This would be cheating. Right now it’s like I would just sit somewhere with these people and introduce a topic – it’s socially acceptable. If I took out a megaphone it would be quite offensive. Only way to do it would be sneaky maneuver of never showing the highlights, but giving them different priority for algorithms that sort people walls. Like it already hides posts from people you never read/comment/etc (and the option to turn it off is gone too), it would never hide yours and even put it on the top first time around (so it was not apparent trickery, but still at the top). These kind of schemes could maybe work for this, but at the cost to the image of entire service.
There is already a huge cost to Facebook — they look desperate.
A picture speaks a thousand words, and William Banzei’s art speaks volumes for Facebook’s faceplant this week.
I just don’t see New York Taxi drivers jumping on this freely traded IPO this week. Only insiders selling out on the sly.
Or am I under estimating the Muppets and their conniving brokers? Maybe Fo -Sho will be proven right. He has a better finger on the pulse than I do.
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“epic fail?”. I would tone down the hyperbole unless you aspire to be like your typical polarizing social commentary.
Hyperbole is good for hits, Ted. But point taken. It is extremely polarising.
This is a dangerous time for you, when you will be tempted by the Dark Side of the Blogosphere.
Speaking of which, I espied an ad on your page for the second time. Last time you said you weren’t doing ads yet.
Need to maintain some cashflow, just like Zuckerberg. Nothing obnoxious or intrusive, I hope. If I get too many complaints I will turn them off, but start becoming more explicit in asking people to donate. And because I am not choosing what gets advertised (WordPress decides) I do not think it compromises my independence.
Cannot seem to reply to your last post so replying to mine … WordPress is confusing.
No need to apologize for making money. You might have chosen to inform us of the eventful news … perhaps in a blog post you could have titled (for maximum clickage)
‘Krugman Hater Makes Shocking Confession: “I Needed to Raise my Aggregate Demand”
No problem from me, and I have been on this site pretty much since the beginning. I actually used one the adlinks. We’ll all have to eat. It is better that John gets paid by independently generated adchoice ads, than me slipping him a few million via the donate buttong and mandating he writes articles in my favour.
Slipping me a few million is good too 😉
OK John, I will write up your agenda for the next year. It will be quite profitable for me. I usually expect a ROI of 5 times my investment. If you exceed your hurdle, you will get a 20% bonus.
Now I need you to read some books to help you with your homework ….
That was sarcasm Ted.
The beautiful thing about a donate button is you can backdate any positive ROI to whatever proportion you like. It’s like a tithe. Much more accountable than consultancy work where you take the money upfront and the ROI is calculated post-facto. If a blog gives bullshit advice people don’t have to pay, if a consultant gives bullshit advice they already have the money.
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For some reason, I’m going to be the contrarian here and say the FB’s stock price rises over the next couple of years.
Just a gut feeling.
Possible. But not in the long run.
Facebook is so 2006. I used it until I realised everyone was Facebooking instead of actually enjoying human contact. Then I said this is ridiculous. The fact you can’t cancel and erase you history completely is a concern for civil libertarian minded people. What if an evil empire gets control of the Facebook Servers?
Congratulationson the founders! There is an old saying used by street hawkers. ““Sell to the most stupid person the most banal object at the lowest margin price. There are so many of them you’ll make a fortune”.
Yeah — greater fools.
We’ve all lost our privacy, it’s old news. Even people that don’t use social media can be easily tracked and researched. If sb can check your FB records he just gets a head start (and lower costs). It was impossible to keep privacy in a village (especially if the huts were tightly packed behind the palisade and had thin walls…) and it is again impossible. BTW I don’t think this is necessarily bad thing, people who want good reputation should lead moral lives not be good at stuffing skeletons in the closet.
BTW I notice the add clicks below. You are doing better than Zuckerberg I clicked on the Australian Stock Report!
I don’t know what users in other countries are seeing but it would be interesting.
WordPress are trying to provide a relevant ads service for high-traffic blogs like mine. I hope users are finding the new ads relevant, and I would be grateful if users clicked them from time to time.
Where’s the revenue growth?
How can a company be worth a hundred times its’ profits?
800million customers, and 3 billion revenue, despite loads of them spending hours a day on it. Mad. It’s a social service, but it’s hardly a business.
Buddy,
Bubbles make no sense. Everyone I know wants to buy FB stock. Now, I try to talk them into other CRAZY investments like booze or Pharma, but they won’t hear it.
I agree about the bubble mentality. Whilst I don’t have a professional position where I have people asking me whether they should buy Facebook stock, I don’t see the hype I saw in the Dot com era. There are too many internet blogs ridiculing Facebook. The fact it did not pop on opening (OK we are in a global meltdown) says something.
If Facebook unwinds, watch out below. Retail will not be coming back. The market needs its “poppers” to keep the retail market happy and the Taxi drivers recommending the stock.
My gut feeling is Facebook will unwind this week, and the panic will magnify the markets losses. People will be ringing their brokers and mutual funds.
Negative yield on 30 year Treasuries anyone?
I don’t see a crash of Facebook this week, but I respect your gut. I see a slow, gradual decade-long unravelling. We shall see — but the book value right now is fucking ridiculous.
synopticist — I wouldn’t be surprised by the way if at some stage Facebook is nationalised.
I’ll breifly add, I run a little business, and I talk to people frequently in my “business to consumer” industry about advertising.
I’ve heard people praise Linkdin, and others who practically run themselves on Google. Some swear by local business directories, A guy I met recently built his company by advertising in church parish magazines.
All of them I’ve asked, and I think I can honestly say ALL of them, have told me not to bother with Facebook. It’s just not a place people go to spend money, or to look for services.
Church parish magazines.
BRILLIANT!!!!!
Yes — real local networking. A real local connection. That’s business — Facebook is just random guessing when it comes to targeting.
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BTW. Facebook users can jump ship to the next social networking toy, but the real money is in LinkedIn. You can’t get out of that one, especially when you have built a professional network. The fact you can pay to “connect” with people by advertising or getting special access (Recruiters love this search tool) means this is a viable business model for the long term. LinkedIn has received money from me. Facebook has not. In my book I will be buying LinkedIn when this market tanks, HARD and only a few worldwide brands businesses ( e.g. Apple, Google, LinkedIn, Caterpillar, GE) will survive the carnage and actually be around to kick of the reset.
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http://www.urbandictionary.com/define.php?term=facebooger
Comment of the decade: Zero Hedge. http://www.zerohedge.com/news/facebook-complete-forensic-post-mortem
derek_vineyard
groupon sent me offer of facebook shares at 50% off today—should i buy?
In this crazy world, I sometimes have a hard time telling reality from sarcasm. I really hope he’s not kidding.
P.S. I think I have the highest-rated Zero Hedge comment of all time(currently +373)
http://www.zerohedge.com/news/nigel-farage-eu-titanic-has-now-hit-iceberg
I love Farage’s speeches. Especially the shots of EUcrats in the background, looking all smug.
Being a sarcastic person, it is definately sarcastic. I could imagine Facebook using the Groupon method of palming off products. Groupon is a fantastic system for finding really good bargain buys.
I am extremely sarcastic, too sarcastic. Sometimes it spills over into reality. Like Groupon doing an offer on Groupon stock. I thought that was real, although maybe not. I never investigated. I would never invest in such junk.
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Reblogged this on Hawks5999 and commented:
If you can’t monetize 900 million users spending hours per day at your site, you aren’t worth $2-$4/share.
It doesn’t look good.
Great article, very interesting. Regards
Looks like facebook is already down nearly 12 percent.
Yeah, those questions the NYT was referring to have now been answered pretty well. And FB is a big cap stock. Seeing a big cap down over 10% in one day raises serious questions.
Facebook at $31. That is bear market territory.
I feel sorry for the new investors that got suckered in the hype. As Facebook is a global network, this will educate a lot of retail investors inot the pitfalls of the stock market, and when they look for answers and find Zerohedge, they will be very very upset. This could get political.
http://www.google.com/finance?client=ob&q=NASDAQ:FB
Like I have said in ealrier posts, buy LinkedIn wh this market has a major correction. LinkedIn will be around for the long term as it is a professional networking and head hunting tool. Real business model. Recession proof too, as people try to market themselves during lean times.
Another perspective.
http://www.marketwatch.com/story/how-facebook-could-destroy-the-us-economy-2012-05-22?pagenumber=2
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Have you people not seen how much Facebook opened for on the public markets? People really need to stop acting like they can see the future. To all you guys who predicted the facebook bubble will bust suddenly and fail, don’t quit your day jobs, unless of course your day job is a stock trader. In which case, find a new career as you are a giant FAIL.
Um, yeah, right.
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