Did IPO burst the Facebook bubble?
Facebook has 900 million users. It has seen its net income rise to $1 billion. In comparison to other social-networking websites or similar online technology companies, it is a substantial amount of profit. However, for Facebook to cross the $10-billion mark, it will need nine billion more users, which is nearly impossible. One prospect that Facebook has is to increase its earnings from the users that it already has, which would mean studying the outlook of the company. Here, the banks involved in the valuation of Facebook seem to have been highly off the mark.
Typical finance theories teach the valuation of a stock. A primary practice is to look at the dividend a stock offers. A company offers dividends from the profit it earns. If the market rate is 5% and a stock is giving 10% dividends, its valuation will rise. But if the market rate is 5%, and a stock gives 1% dividends, its valuation will fall. An investor looks at several factors when trying to build a portfolio. Intrinsic value is something that comes into consideration. Some stocks are seriously undervalued, and they can be a good investment. But investors shun an overvalued stock, and if no one buys it, its value will decline until it reaches a price it deserves. Simple math shows that Facebook will never be able to give a 10% dividend, which should be the ideal figure for a sound investment. Of course, with the money it raises, it can build into the company and increase the revenues it generates, but there is always the risk that its investments may fail, which could lead to a major debacle.
Unlike Steve Jobs, or the duo at Google, Mark Zuckerberg hasn’t really been such a joy to watch in innovation. Given the social networking avenues, users may not be able to keep up with changes. Facebook has seemingly gone behind from being at the forefront with every new change it brings. Some are good, but the timeline doesn’t seem to have found too many fans. Many still don’t use it and would rather never use it. Facebook should be more customisable as well, as different people like different things and it should be adaptable to all. These constant changes speak highly of the risk attached to the organisation, which seems threatened by competitors that could beat it.
With the IPO, it seems that Facebook’s time of reckoning has arrived. It will either crumble or turn into a major organisation. It seems to have stepped up a gear in the online technology race with its interest in buying the Opera browser, by replacing Chrome with Opera in as its ‘recommended browser.’ While Opera isn’t the market leader among browsers, it could turn out to be a good acquisition. It is not yet known how much the deal would cost Facebook, but they would surely have an idea about the returns.
Should Facebook try to be a web company first? Maybe. Interesting acquisitions of web-based companies could place Facebook in contention for leading the online market.
The author is CEO of CottonRunners.
The views expressed by this blogger and in the following reader comments do not necessarily reflect the views and policies of the Dawn Media Group.