Will Facebook’s market saturation saturate Wall Street’s greed?

Image (c) by http://www.flickr.com/photos/ktb/

So, it seems Facebook has achieved market saturation in the US in 2011. Now the fun begins, at least I am beginning to smile. While some already ask for more and different social networks, I could fall in love with the idea of a giant failing to fulfill dreams, expectations and desires from now on and taking some of its investors with him. Market saturation for a company which hasn’t gone public yet is a very interesting constellation and, at least to me, it is new. That makes it dangerous, as markets don’t like new that much, they are rather conservative. From now on it will be much harder for Facebook to convince sometimes irrational, conservative markets. Because imagination and dreaming potential is now reduced to more boring and sublime facts which in addition might also be more difficult to communicate. Instead of user growth, Facebook will need something else, another edge, another angle where it can excel, to convince public markets and its traders in the future, when it will be a public company. That is really hard to do, even for Facebook.

Previously, in the era before market saturation, investors could argue with impressive figures from Facebook and build up dreams that were fueled by user growth. It is simple math. Take existing, impressive figures and multiply it by an expected user growth rate and you get imaginary, but even more impressive figures. It is what you call a ‘run rate’ and Wall Street likes that. Private Investors certainly have taken into account future user growth when they valued the company in the many private rounds in the past. Facebook’s impressive ‘run rate’ was always priced into the pre-IPO valuation.

In the era post market saturation, that formula is no longer viable, the run rate slows down, the goal is achieved. Facebook made it and achieved market saturation. Yet the question will be if investors and Facebook itself can make the switch to a different formula that will have as much dream potential and imagination and at the same time is easy to communicate? No doubt, Facebook is a valuable asset. For some, it is indispensable. But for years, Facebook’s value was only limited to its impressive user growth and ‘run rate’ by too many people. Back then, it was good, because it is an easy to understand parameter where Facebook outpaced competition every time. And it is easy-to-understand parameters that Wall Street loves.

Now, it will be very interesting to see if sometimes irrational markets are ready to evolve and apply to Facebook different valuation standards than before market saturation and if Facebook finds that other easy-to-understand-and-still-full-of-dreams measure or formula. No doubt it will be interesting to see, as dealing with a company that achieved market saturation is something Wall Street hasn’t much experience in, at least to my knowledge.

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2 thoughts on “Will Facebook’s market saturation saturate Wall Street’s greed?

  1. [...] expressed my doubts five months ago in my last post and if you still plan to invest in Facebook, read it now, please, it is free and good advice for a strategic long-term “value [...]

  2. [...] saturation, Facebook stock dropped. Again. What’s happening right now is basically what I questioned already in January. It seems I wasn’t that wrong about how Wall Street would behave in sight [...]

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