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/

From Value and Stock Performance and Apples and Oranges

Yesterday I wrote a few lines about the recent Microsoft Yammer deal for $1.2 billion. My point was that what Microsoft is lacking focus which would result in a big destruction of company value – much more than the premium they paid for Yammer. And today, I wanted to show a chart with the stock performance of Microsoft, Apple and maybe Google to underline my point here. But strangely enough, the chart doesn’t really work out. Microsoft’s stock isn’t actually doing that bad. So either I am wrong with my assumption that Microsoft lacks focus and thus destroys company value step by step or investors see things radically differently.

Or maybe it is not even a contradiction? What’s the story when you ignore the superficial data and dig deep into the fundamentals?

Superficial data cries to be compared to superficial data from others. We all love to compare and we will do it again later this year at the Olympic Games in London. We simply love to put things into perspective and do it almost every time.  We do it now with Jive Software, which sees its shares rise big time because of a comparison with Microsoft/Yammer. Jive Software is apparently in the same “space” so we compare. People and investors create “multiples” of superficial data like revenue, earnings, etc. to benchmark such ratios to similar companies and determine their value. That’s easy to do and they even look incredibly smart when they do that. It just has nothing to do with value.

Value is not superficial. Value is fundamental. The intrinsic value of a company is its continuous ability to solve one or more problems for which one or more markets require a solution. Focus is the ability of  management to secure the company’s capabilities and resources to solve market problems. Lack of focus is the contrary. These are qualitative measures. They cannot be compared. But they are actually the source of long-lasting company value and still they are largely ignored in investors’ metrics.

Value and stock performance seem to me like apples and oranges now and I wonder why I ever wanted to show a chart to underline my previous point. I’ll never try to do that again.

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