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Friday, 18 May 2012

Sell Facebook

Facebook is going public with a valuation of $104 billion, although they are only selling $16 billion worth of shares. Here's a tip. At that price avoid it like the plague. In fact, short the plague. Put all your assets into shorting the stock.  The price won't last, just like the radioactive decay that was Lastminute.com. And here's why:

Capped Revenues
Facebook makes its money from selling advertising space based on the information supplied by users. And it says it has a lot of users, about 845 million. So far, so smart. Facebook is currently valued at 100 times earnings, which sounds fine for an internet startup that has been around for a few years, but not so smart for a company that claims to have 70% of internet users signed up.  There isn't much room for growth there, and certainly no way to grow the revenues to bring up the "e" in the p/e ratio so that it hits the 8 to 12 expected of a mature company. Expect the "p" to fall.

Ever growing cost base
Unlike many internet companies, Facebook does have financial data, but the picture it shows is not that great.  It is profitable and it is growing fast, but the problem is that Facebook is not like most internet companies where the fantastic profits come because of the incredible scalability of the internet. At Facebook the rapidly increasing revenues are closely followed by rapidly increasing expenses.

That is not how it is supposed to work.  The idea of an internet venture is that you invest all your money up front in development and then you sit back while your fixed cost base produces an ever increasing revenue stream.  The trouble with Facebook is that this year's cost base is higher than last years revenues.  Eventually the revenues will stop growing and this year's bright star will become next year's dog.

New Entrants
Give me $104 billion and I can build a rival product that will eat into Facebook revenues. Easy.  In fact give me $104 *million* and I can do the same. So give me $1 billion and I can build a rival product, hand over $1 to every Facebook user who switches to my system and pay them $1 in cash, which is roughly all you would have to pay to get people to switch.

Existing Competitors
Actually, you don't need to worry about any new businesses because there are plenty of other companies that can advertise in your face while online and they have better business models.

Nobody gets onto Facebook to go shopping.

Ebay, Amazon and Google know what I want to buy because I search for it on their websites.

Facebook knows my favourite colour.

Ebay, Amazon and Google know that I want a 5V micro USB power supply, solid oak gate posts, hard to find cupboard hinges and a new satnav.

Facebook knows that I like the bands whose CD's I already own, and where I went on holiday last year.

I probably want to go somewhere else this year. I will check out that somewhere else on Google, thank you very much.

The World Moves On
Facebook started as a desktop system, but the world is going mobile. The IPO prospectus mentions the word "mobile" 123 times, and 425 million of the 845 million monthly active users (MAUs) at December 31, 2011 are mobile users. Mobile users are growing faster than other users, and expect that trend to increase if Facebook breaks into China where mobile phone usage far exceeds internet connections.

Facebook do not make any money out of mobile users.  The prospectus says "We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven".  Worse still the prospectus says that the company's revenue growth could be harmed if it cannot "successfully implement monetization strategies for our mobile users".

Could? Make that will.

Crap Management
Zuckerberg. Say no more.  He actually says he doesn't really care about advertisers.  Do you really think he will care about shareholders once he has your money? Dream on.

Falling profits
To justify such a high p/e Facebook needs to be growing its profits. Sadly they fell 32% between Q4 2011 and Q1 2012. And revenues were down 6.5%.

At $104 billion this is a no-brainer. And if you want a feel for how screwed you would be, the shares on offer are "A" shares, which carry one vote per share, as is normal, but the current owners' shares are "B" shares, which carry 10 votes each. Zuckerberg will own less that 50% of the shares, but 56% of the votes. Go for it suckers.

2 comments:

webwrights said...

Another point made on one of this morning's radio business programmes was that the "900 million users" figure is a fiction, like so much else about Facebook. It seems that many people use Facebook for gaming, and have multiple accounts in order to send themselves 'gifts' and free points.

I have several Facebook accounts, all in fake names as I would never have a real profile there. I have one in a pseudonym, which is only used as a point of contact with godchildren. There are 4 spoof accounts (which were set up as jokes and are long dead) and one nonsensical group set up to 'honour' someone who had annoyed me. That too has served its brief purpose.

So, although I'm not a typical user, I'm responsible for 6 accounts which have absolutely no potential revenue value whatsoever.

The probability is that Facebook will go the way of Friends Reunited, Myspace and so many other fads. My first job was in publishing. My boss would look at a book he felt had no market and say, "I smell remainders".

Steven_L said...

Quite right, just nearly fallen out with my flatmates arguing it's overvalued.

People are so stupid.