Facebook is floating not flying or sinking after stock market debut
Facebook finally floated on the stock market today, after a lot of hype and spin. It’s a moment when social networking really came of age and it’s now one of the most valuable companies in the world.
But what’s interesting is that unlike when other internet darlings floated, the shares haven’t left up. Nor have they sunk. I’ve seen first hand how that can happen!
It suggests that Facebook was valued correctly, at a staggering 65 times profits. Small investors tried to buy stock and at one point, people were paying $70 a share in Germany. Although as I write this, the stock is worth $41, valuing the company at $113 billion. Which I think is probably about the right value.
Why is Facebook worth so much, even though it hasn’t made much money? Investors are ‘pregnant with hope’. We don’t know exactly what it’s going to do when it continues its commercialisation. Investors can hope that it will do wonders, that it can rival Google when it comes to the share of advertising or PayPal when it comes to online transactions or maybe Apple when it comes to selling digital products like games, apps and films. All of these Facebook is sort of doing. But right now, it’s just doing them a little.
The closest company there is out there to Facebook is Google. Google is a company that provides a digital product (mainly) for free to consumers that it monetises in different ways, partly through advertising and partly through transaction commissions. But Facebook’s advertising is very different from Google. On Google, I search for things I actually want to buy. When I was renovating my new house, I found every item either through Google or eBay searches. I should add though, that some of my friends asked me via Facebook where I bought certain items they liked when they’d been over or seen in photographs from the building project. The later makes no money for Facebook while the former is a cash cow for Google.
Facebook doesn’t target advertisements based on the private conversations you have with your friends (unlike Google’s Gmail) but it does target them based on the public things you have done. So if you “Like” a particular brand or if you’ve been posting public statuses saying “I want to buy a new car, any suggestions?” Although I suspect that it would be hard to prove from a return on investment perspective that a decision to buy a car would be put down to one single Facebook advert. It’s probably easier to prove for buying a concert ticket or another lower value item.
The real value to Facebook isn’t from big advertisers, right now it’s still about you and me and the services we use. The rest will come, in time. Don’t worry.
Want to sign up to Spotify? Use your Facebook login. Want to use Pinterest? Connect with Facebook. The list goes on and on and Facebook is making itself the operating system of the web. There will be some very exciting services launched over the coming years that put Facebook at the heart of everything it does.
And there are the advertisements that we might pay for ourselves. Now I’ve written before about why having a lot of public subscribers of my Facebook profile (72,157 at the last count) has meant that my posts are becoming less and less relevant to my actual friends. Consequently, less and less of them actually see the things I post on Facebook. Now the company is experimenting with a new system where you can pay for your friends to see what you post. Yes seriously, paying for your friends to see what you have to say, a photo you think is amazing and so on.
Facebook has been experimenting with this format in New Zealand where users pay around £1 for ensuring that more of your friends see your content. At the moment, an average user’s content will be seen by only 16 per cent of their friends (unless it’s massive news such as an engagement). It’s not a large amount of money to pay, although I have to say it would seem more than a little vain to do so. But it could be genuinely useful, occasionally. So imagine if each user did so twice a year, that would be almost £2bn of revenue, for next to no costs, pure profit.
Features like this are just the tip of the iceberg, Facebook has extraordinary long term value for investors and as a company. It has redefined the web and even if it doesn’t make huge short term revenue growth, it is destined to be a globally significant company for the long term.
So here’s the big question, did I buy Facebook shares? The answer is no. It’s not because I don’t think they will go up in value, it’s just simply that I don’t have enough money spare to stick into the company to make a decent return on my investment or effort. Putting in £1,000 now will probably be worth £10,000 in a decade’s time. But it’s a long time to wait for a return with no dividend. If I had £100,000 going spare, it would be another matter.