Dawn News

Did IPO burst the Facebook bubble?

Facebook IPO listing
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.

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The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.


Comments (8) Closed

Jun 03, 2012 10:44am
With due respect, you have delved into the specifics of a subject you have a high-level understanding of but seemingly nothing beyond. On what basis do you forecast that FB will NEVER payout a 10pc dividend? And, that a 10pc is an "IDEAL" return on a SOUND investment? Company valuation is an art not a science and is not expected to yield one precise answer. Financial markets do not always behave rationally and therefore simple maths is too simple to be relied upon.
Jun 01, 2012 04:11pm
"However, for Facebook to cross the $10-billion mark, it will need nine billion more users, which is nearly impossible." I stopped reading when I read that.
Jun 02, 2012 05:29am
Good article but not sure it make sense also to include technical glitches that disrupted Facebook’s NASDAQ debut & Morgan Stanley, the IPO’s lead underwriter role .
Jun 03, 2012 11:16am
Facebook will be dead in less than 5 years time. Zuckerberg is laughing all the way to the bank.
The Writer
Jun 03, 2012 11:27am
The 10 PC return is ideal because that is the free market rate here in Pakistan. If you'd invest in a bank instead of facebook, you'd get a 10 PC return for your money. It is the basic judgment used when evaluating a stock or a bond. Company valuation goes beyond simple math, but the math comes before anything.
Jun 03, 2012 11:00pm
If the bank deposits are returning 10pc I would want a much much higher return from FB shares to compensate for the risk involved in investing in shares vs. bank deposits..... i.e the "ideal" return is not 10pc but much higher. There are a lot of real world examples of investments that had zero dividend yield but rose in value significantly. Going back to your 10pc rule ...... surely they would have been not so sound investments ..... Also, if you wouldn't mind sharing the simple math behind FB not being able to return a 10pc return EVER would be interesting
The Writer
Jun 04, 2012 06:46am
I have never said that facebook can never increase its revenues but a $100 billion valuation needs a $10 billion return. Current returns are $1 billion so its quite a challenge. Seeing that you yourself would like a risk premium charged, facebook needs to work very hard to build on their returns.
Jun 11, 2012 07:48am
@Novice and the writer. There are two kinds of stocks. Risk Free (such as government bonds, govt securities etc) and Risky. Rate of return on Risk Free Investment is used as a benchmark for any investment. 10% on government bonds, or national saving schemes is risk free. If you are going to invest in any stock on STEX than it involves risk. Two types of risks are involved 1) which are attributed to the company and may be controled by the company 2) which are attributed to the market and economy where the compnay operates. The more risky the stock is the high return you will expect and they will be offering, the less risky the investment is the less return an investor will get.