Whether it is successful or not is yet to be seen, however,
the $16bn. IPO of Facebook ($18.4bn, if the underwriters exercise their IPO
option at the listing price) will set example of many more similar
entrepreneurial ventures monetizing their creations. Whether sales of $3.8bn,
last year justifies this price or not is yet to be formalized. The model around
which the story is doing rounds is the Advertising sales (well wasn’t this the
model that Mr. Zuckerberg loathed while creating this asset.)
Whether this is just the lack of companies to invest in and
monetize by the hungry investment bankers and the PE industry or whether
‘someone’ saw ‘some’ intrinsic business value based on an excellent business
model is yet to be seen.
The total money supply of USD is set to cross $9 trn., and
the US economy has slowed down considerably since 2008, with its GDP growth and
job market just barely justifying the money or fiscal stimulus being pumped in
or was pumped in. There is no manufacturing or infrastructure growth which will
justify the amount of money being pumped in. The consumption pattern has shown
a declining rate, the government is hell bent on keeping the interest rates at
its lowest till atleast 2014 so as to kickstart the biggest consumer economy in
the world. This, they hope will kickstart the investment climate and grease the
wheels of the economy so that it starts moving again. However, job growth data
is not sending any positive signals and the business climate remains uncertain
owing to Euro crisis. Grexit (Greece Exit) is all but inevitable. Austerity
measures are not helping either the economy of the politics of any country.
Spain is soon slipping down (the fresh issue of bonds last Thursday is proof
enough of falling investor confidence).
The point of the above ‘Gyaan’ is just to highlight the fact
that given the circumstances, the investor climate and the business climate is
not conducive for any business to flourish, leave alone expand. And to be
honest every banker (this particular profession is off late getting enough bad
publicity like the lawyers always dread) needs a company which is a darling of
investors, so that they can churn out as much fees as possible. ‘Facebook is
just the right answer’. In one of the books by Michael Lewis, I read that
during the famous crisis post the ‘Honeymoon’ era of growth i.e. early 2000’s
till 2007, Iceland, which was essentially a fisherman’s economy and had no
experience whatsoever in Investment banking soon started acquiring Banks and
Football clubs. This was fuelled by the cheap money supplied due to their
credit rating enhanced by the European union, which led to excessive real
estate boom. As neither had they had access to such kind of money, nor they had
the experience of handling such money, they started transferring the same
assets at inflated price on each other’s balance sheet. So imagine an asset
(say land) having underlying value to INR 100, being sold for INR 120, then the
same being floated around with a story and little value addition at INR 140, and
so on. The value of the asset is increasing due to the increase in money supply
in the economy and not because its creating any value.
Now compare this scenario to the IPO in question, there is
no set emphatic and innovative structure of revenue which the company has to
offer apart from advertising (which essentially was uncool for facebook to
start with). Once, just to please their investors, the company throws the towel
for advertisement, it might cheese off its users. However, that is still a big
question mark. Also, other similar IPO’s in the past like Groupon are reeling
under pressure and are trading lower than their IPO level prices (Is this a
cautionary note). However, Facebook is clearly a different value proposition
and first of its kind to hit the bourses, so it remains to be seen what will be
its plight (pun intended)
So, is it creative PR and false stories and bankers and PE
managers who don’t want to miss the bus who artificially inflated its price tag?
There is immense pressure on the financial industry to perform, as most the
fund managers have barely made any returns on their portflio’s since the last
crisis. So was this a herd following (carefully crafted) to ‘create’ an asset
with no underlying revenue model. A 107 times is trailing 12-month earnings and
about 26 times its revenue in 12 –month as on March 31. This is no joke, no one
gets that kind of valuation. Apple inc. with a super-cool product line which is
a hit amongst the hoi - polloi and oozes the oomph factor amongst consumers and
investors alike has a valuation at about 4.5 times its revenues and a PE ratio
of about 12.93. It might not be an accurate comparison; however, we are
speaking of valuation unheard of (or maybe heard off during the dotcom bust).
But are we trying to ignore the signals of 2000 – 2001. Fine, it has a user
base of 900mn users, but ‘how’ do they monetize it.
I want to compare Facebook
to Central park (which is also a social networking platform), where approximate
users every year are about 38mn. This is immense, but how do you monetize
Central park visitors. Yes, the park is maintained through probably government
funds, donations and park fees, etc. however, once you start advertising all
over the park and charge customers, imagine you’re spoiling the beauty of it.
Probably Facebook should be nationalized and be maintained
out of government funds pooled in by various governments depending on their
country user base, as definitely its become a massive force which is beneficial
in more ways I can think of. In the past mass movements like aggregation or
start of revolution in Libya and other North African and Middle east countries
started though Facebook, following which governments of various countries have
stopped Facebook access, due to the danger it poses on creating a domino
effect. However, in all the above cases the reason has been more socialist than
capitalist. The opening day did not offer any respite, the opening day could
not break the $40 mark, when the IPO price was $38. Fine the signals were
wrong, Spain is under pressure, there are talks of Grexit. However, if the
investors saw such a strong underlying intrinsic value in FB (as they famously
address it) why did not it show on its opening day price levels? It seems like
everyone has their eyes shut to the fact that because no one knows what lies in
the FB story, so it must be good, as everyone’s buying it.
However, one fact that cannot be ignored is that this kind
of money will open up doors to innovation in the social media and ecommerce
space. We will see more innovative offerings in future, however, if this
company fails to charm its investors, the reverse domino effect might start and
before anyone knows the stock will be dumped and moved on upon. That will again
lead to a logjam and another set of bust which swarmed the world markets in
2000 – 2001. There should be caution and only the slightest hints and consumers
and investors will flee to the next best alternative.
