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In my last post I questioned the value given to Facebook in their IPO. It became clear at the close of first day trading that things hadn’t gone according to plan; the usual ‘Day One Spike’ associated with high profile technology IPOs just didn’t happen, and I have a feeling that the only reason that Facebook didn’t end the day lower than it did was because the underwriters of the IPO bought up stock to shore up the price.
Of course, that what the under-writers of IPOs are partially there for; they pick up the spare stock and keep the price up, but given that the slump has continued for two days trading now, I am beginning to wonder whether the initial price was artificially inflated for the egos / benefit of those involved. If so, that is totally unacceptable beccause it means that the ‘civilian’ buyers of the stock – those not in on the game – paid over the value of the company from day one, and it is increasingly possible (and indeed likely) that everyone involved in the launch KNEW that.
There is an interesting article here, by Michael Wolff, that states what quite a few of us have wondered for a while. Given that, beneath the hype, branding and bells and whistles, Facebook is an advert supported site, how on earth do they expect to make such money as a 100 billion dollar price tag suggests? And Wolff should know; he wrote the book ‘Burn Rate’, which documented the crash and burn of the first dot-com boom a decade ago.
The problem is that it’s not just Facebook at risk here; a bad IPO in a sector colours the views of those preparing other stock market launches. Out there are lots of technology start ups, all wondering about financing. A solid Facebook IPO would have possibly led to a market place that was more willing to put money in to smaller companies that needed much less money and that might even have been producing goods and services of greater value than the ability to play Farmville or post statuses. And by ‘solid’ I mean exactly that – a sound valuation – if the fall continues then it may well be that a valuation of 40 to 50 billion dollars was MUCH more realistic – that didn’t require urgent under-writer support, that showed healthy secondary trading over the days after launch and that also showed a steady growth as people realised that Facebook had some value that could be exploited – given availability of money. After all, that’s what an IPO was ORIGINALLY supposed to do – give some money to the founders but mainly give the company money to develop.
As it is, Facebook was clearly over-valued – whether by intention or accident we don’t know – and analysts are finally asking the questions that should have been asked months ago. Facebook’s last minute purchase of Instagram to try and grab mobile traction looks increasingly like panic. The company may settle down to around $50 billion dollars – still, IMO, overvalued but the markets could probably live with it.
But back to those other comanies in the wings. Based on previous technology trading cycles, a bad high profile IPO:
Historically this tends to lead to a deflation of the tech market place – the last thing we need now.
As is said in the Pythian Scrolls in Battlestar Galactica : “All this has happened before, and all this will happen again.”
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Well, despite the state of the world economy, Facebook finally managed it’s IPO today and ended the day at roughly the same level as it launched at, having had a high point of about $42 and a start point of $38. Now, when I were a lad we did IPOs differently – take the VA Linux IPO in the 1990s – a first day increase of nearly 700% on the starting price…..
But the world is different today, and the markets are older – although given recent behaviours not any wiser. The Facebook IPO was never going to be a show-stopper of the type we saw in the first dot-com boom, no matter how people hyped it up. But, even Linked In, that had it’s IPO more recently, opened at $45 and closed at around $90 on the first day. So what happened to facebook, and why should we care?
To start with, the opening price was, in my opinion, incredibly high for a company that simply peddles user generated content, games access, in game currencies, personal data access and adverts. And that’s why we should care, because ultimately the value of Facebook will depend upon how advertisers and data crunchers value that content and the 900 million users of Facebook, and whether those users will keep playing the Facebook game.
Why did Facebook go public? Traditionally, companies go public when they need a market in which to sell shares in the company to investors in order to raise money, typically for expansion, moving new products to market, etc. In recent years – especially in tech industries – the IPO has been seen as a means by which the people involved with the startup can flog their shares and get rich quick, and I’m afraid that’s what I see happening here.
The big question is – how is Facebook worth $100 billion dollars? That’s more than Ford and more than Macdonalds. Last year Facebook returned a profit of a billion dollars on revenue of 3.7 billion dollars, which isn’t bad going. Ford had revenues of over $100 billion, and profits of over $6 billion in 2010, having reduced it’s debt by $12 billion in the same year. Not bad either. But Ford only has a market capitalisation of $38 billion. So, that market capitalisation of Ford of 38 billions is related to a profit of $6 billions. Now, whilst you can’t compare Internet and non-Internet stocks, if I were to apply the same rules I’d start thinking that Facebook should, on those proportions, be floated at no more than $6 or $7 billion.
Let’s be fairer and take Google as our reference point. It’s Internet stock, after all. Current Market Capitalisation of $197 billion, revenue of $40 billion and income of $10 billion. Applying some ratios again, Google seem to have a profit of about 25% of revenues, and a Market Cap. of around 5* revenue. Now, Facebook has profits which are not that far off of the same ratio as Google – 1/3.7*100 = 27%, so if we apply the 5* rule we get 5*3.7 billion – let’s be generous and say $20 billions.
So, Joe’s rough and ready calculations say that Facebook should have sold at $20 billions. Now, I’m not a stockbroker – in fact, I’m not brilliant with money at all, but this seems….logical. The difference between Google and Facebook, of course, is the magic words ‘Social Media’. After all, Social is the future, according to the pundits, so it must be logical that the Facebook valuation reflects something of the massive profits that people expect to make from Social Media in future. Yes?
Right…let’s look at Linked IN. Recentish float, social media company, not so many users, blah, blah. Market capitalisation of $10 billion dollars (no missing zero), Revenue about $670 million, profits about $17 million. Oooer. So Social isn’t necessarily the magic word.
So what could that magic ingredient be? What do analysts think makes Facebook worth so much? Do me a favour. If, like me, you’re a Facebook user, walk to the bathroom, look in the mirror. Say Hi. You’re looking at 1/900 millionth of Facebook’s secret sauce. Those investors are putting a lot of money in to the hope that we will continue spending money that can, in some way, be associated with our use of Facebook. Now, I’ve not spent a dime through any Facebook related advert, game or doohickey in the 4 or so years I’ve been on there. I rate every advert that pops up in my Timeline (except for the ones from Charities and non-profits) as offensive. How we use facebook from here on in will make or break a lot of fortunes.
If you want something to put a smile on your face today, remember that 1/900 millionth of Mark Zuckerberg’s arse is yours. Collectively, Zuckerberg is our bitch.
My wife and I have always had cats – folks who know me may remember the comment I often make that I love my cats more than I love the vast majority of human beings. Whilst I say it with a smile, I sometimes think there’s a large amount of truth in that statement, particularly after watching the news on TV…
Last October we had a new arrival – Georgie (named by my God-daughter) turned up out of the early evening darkness and took up residence. We had no idea where she came from, but she was in bad state – skin and bones, matted and dirty fur, starving, cold and tired. Within a few days it was obvious she was going nowhere, and our ‘boys’ – our two male cats – found they had a new housemate.
Georgie in her basket
The photo on the left was taken a month or so after she joined us – she’s fatter and more ‘together’ there – the grey bits of fur are where we had to cut off some seriously matted areas which quickly grew back.
We had no idea how long she would last. We knew she was old and probably had a few health problems, but she kept defying the odds. We first said ‘She won’t manage it to Christmas’, then it was ‘Won’t manage the winter’. She did – she also took to wandering around to our next door neighbour and sitting on her lawn, getting fed in two households. Despite her age she tackled the cat flap with gusto, leapt up and down on to tables, helped to type Tweets on computers, took the phone table as her bed and became one of the family.
About 10 days ago she became less active and her habits became quieter – this wasn’t too much of a surprise as she did this occasionally. Over the last few days it became clear she was not herself and so a trip to the vets was arranged yesterday, where it became clear after tests that she was a very poorly lady indeed and that she probably only had a few days left with us.
We decided to let the vet put her to sleep, and went back to the vets to be with her – it was typical that as soon as she saw us she jumped up and purred. She left us very quickly, very peacefully.
It’s astonishing how big a tiny cat with us for only 8 months could leave such a big space in our hearts and lives.
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It always takes me a while to catch up with things, but it was recently the 30th Birthday of the Sinclair Spectrum. Like many of a certain age, the Speccy was one of the computers on which I cut my teeth. I was lucky enough to have been exposed to most of the popular home computers of the late 1970s and early 1980s by virtue of my first job and the fact I wrote articles for the computing magazines of the time.
I’d already bought a ZX81, and became the Z80 Machine code Guru for my employer – I was also writing books for Melbourne House on the Z80 based MSX machines – and the two worlds overlapped when I was asked by my employer to develop a way of extending the BASIC language of the Sinclair Spectrum to allow new commands to be added to the language. I managed to deliver the goods – oddly enough around the same time a magazine article was published that detailed a similar approach to my own – and I added writing books on Spectrum Machine Code programming to my repetoire.
I also wrote a fair number of articles about programming and interfacing the Sinclair machines, designed interface cards for it for my employer, dabbled in a little light robotics, but rarely actually USED the machine for anything! When I needed to write these articles and books I used my BBC Model B which had a proper keyboard. How I hated that rubber monstrosity on the Spectrum – the later Spectrum 2 had a better keyboard and made life easier, but one still had to deal with the multi-function behaviour of the keys. I think that that was the single biggest hitch with the Spectrum; had the ‘dead flesh’ keyboard just had ‘normal’ keyboard functionality, where you typed stuff in letter by letter, I think it would have been easier.
Still, I can’t grumble. This was in the days when if you were good enough to write and have your material accepted by a publisher, you got paid for it. This may seem something of a novelty these days when blogging and other forms of self-publishing seem to have ripped the heart out of traditional (OK, paid!) technical writing, but those magazine cheques of £40 or £50 went a long way!
I think that the Spectrum was one of two machines I bought (the other being an Amstrad 6128) that actually paid for themselves from my writing. That immediately makes the Spectrum special to me. I also learnt a HELL of a lot from it about low level programming, hardware interfacing, robotics and the Zen like patience needed to manage that keyboard and a tape recorder for saving and loading programs…..
Funnily enough, 30 years later, I spent several hours in my current day job looking at an interfacing problem involving a PIC Microcontroller. And the solution I eventually suggested was one that I dragged up from my Spectrum interfacing days….