Tag Archives: facebook

Dear Facebook, Wall Street is not your problem. Your ego is.

Facebook is in the news again. And as so often after its IPO, it’s not good news because Wall Street plays strong. But also more than fair.

Facebook’s user base is declining in countries where it reached a penetration rate of 50% or above. Consequently, in sight of growing market 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 of a company which has reached market saturation in most of the more lucrative world markets, especially the US. Facebook clearly seems to be clueless about this new situation and it’s a pretty new situation to them. They’ve been investors‘ darling ever since because their story was just too good. Existential criticism is totally new to them.

Today, it’s a different game with different rules. And I am not sure yet if Facebook realized this. The new shareholders are investing for one of two very special reasons – earnings per share or increase in total share value. Facebook’s previous investors poured money into Facebook because of the outlook of a positive IPO itself. That’s two totally different motives.

While Facebook did considerably well raising the IPO hopes, it is very bad at playing the Wall Street game now. And unless Facebook’s strategy shifts towards accepting this new reality and honors the new ownership by increasing (or just starting to create?) real company value and not hopes, I believe Facebook stock will continue to see only one direction – down. Some people at Facebook, those with all the shares at least, cry when they see the current stock performance and some might believe this is just not right. But it is not about right or wrong. It’s about Facebook’s ego which is still just too big. And the good story is partly to blame for that. But sooner or later Facebook needs to face the new reality. It seems to me sort of a self-fulfilling prophecy that Facebook’s valuation will continue to decline as long as their ego is so big and they continue to think that playing to the rules of venture capitalists will get them through. But Wall Street investors like big pension funds and financial institutions think differently. As it seems now, Facebook still hasn’t realized the urge to shift from a venture capitalists’ darling to a company with a management that is serious about company value.

It’s time to wake up, Facebook. You voluntarily chose to play this new game so now you have to do it. Don’t hate the players.

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

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What’s your story now, Facebook?

Facebook Stock PerformanceLong time, no post, I know. No excuses here, but hopefully now at least a piece you enjoy….

There has definitely been some hype around the IPO of Facebook in the last days and at least the same level of disappointment. While I wasn’t following the IPO that much, I also wasn’t surprised by all the downs. I already 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 investor“.

So, what happened exactly?

Following the all-so-much-hyped IPO attributing a ridiculous valuation to Facebook, its shares dropped significantly. Media had something to talk about and found some poor people who they held responsible for the disappointment, but it’s all relative.

The truth is sometimes simple. There are three players here, Facebook, the financial markets and us users including the media. We all love Facebook. Facebook is social and as human beings we love social. Plus it’s the story of Silicon Valley, the story of a  dream for many of us. The financial markets, on the other hand, are not stupid. They are not social but driven by simple financial metrics such as dividends and increases in company value. We all know that much of the trading today is computerized trading anyway, so it is really the contrary of social. Facebook on the other hand embraced social as its “raison d’être” and never worried too much about what financial markets wanted.

So, what went wrong, exactly?

It is as one colleague recently told me as well: “I have to sell these guys a story!” That is what Facebook didn’t do or perhaps isn’t even able to do. What would be worse, I don’t know. But the markets have just made it clear that they want to have a story for them and not for the users. And that story must include profitability, revenue growth and a strong and stable business model. That’s what they appreciate and what they didn’t get. As I said in my previous post, Facebook needs a new easy-to-understand-and-still-full-of-dreams formula, but this time one for the financial markets. I am curious to see that.

So, what is your story now, Facebook?

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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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