News & Analysis
Facebook IPO Is Bubble Redux?
A global frenzy buzzes now like so many angry bumblebees. At any moment, a company started in a dormitory just eight years ago will sell promoted common shares to the investing public and become the hottest technology diva ever. Unusual animal movements have preceded extraordinary natural disasters—might they also mark onset of man-made financial mayhem? Hundreds of millions of us like using Facebook. At first blush the features and benefits seem a compelling bargain. But as far as investors in this offering are concerned, are valuation levels for Facebook's Class A common shares supported by realistic hope or by artful hype? – Washington Times
Dominant Social Theme: Now that Facebook is worth US$ 100 billion, where's the next hot deal?
Free-Market Analysis: Frankly, we've been surprised by the lack of articles doubting Facebook's US$ 100 billion valuation.
This article in the Washington Times, written yesterday, is about the closest we could come, recently, in the mainstream media.
We've been frank about our perception of what Facebook is – a creation in part of American Intel, which evidently and obviously has a stake in utilizing the data that Facebook "mines."
For this reason we have described Facebook as lacking a business model, which is odd for a company that was just valued at US$ 100 billion.
Where is this business model?
Google provides a service – a search algorithm. Microsoft provides computer software. Apple provides innovative and beautiful software.
We had the same nagging skepticism when it came to Yahoo. One day, not so long ago, we realized that whatever Yahoo had been, it wasn't that now. We couldn't define, in fact ,what Yahoo was – and others seem to feel the same way. Yahoo is on a long skid down.
And what about Facebook? It sells "connectivity" – but really, that's a fairly ubiquitous thing in this era of technology togetherness.
One can connect in many ways.
Thus, Facebook's barrier to entry is exquisitely thin. It can be undone at any time. Anyway, connectivity doesn't seem to us to be a very good business model. A business model, after all, involves money – invoices and payments.
What exactly is the bottom line for Facebook? As we tried to point out previously, the viewers themselves are not easily monetized. Many of Facebook's users may have double or triple accounts. Many may not use the system very often.
GM just pulled ads. And Mark Zuckerberg just bought a company he deemed a threat to Facebook. He paid US$ 1 billion for it.
Neither of these incidents bode well for Facebook and so we return to our original proposal. Essentially, the company is worth whatever information it can pilfer from its client base. And that information may be worth more to the American intelligence companies that apparently crowd around Facebook than to the private sector itself.
This is a company, then, that is fundamentally at war with its users. It provides the "thinnest" of services – social connectivity.
Go online and it is hard to find a kind word for Facebook. Feedback to articles (not the articles themselves) is crammed with comments on Facebook's various problems from a business standpoint.
Many deplore Facebook's lack of real privacy and manipulation of data and are skeptical about the company's prospects going forward. We share the same sentiments.
We cannot account for the US$ 104 billion that the company is putatively worth now. Google, with ten times the earnings, is worth the same amount, capitalization-wise.
Here's an interesting comment from Keith Hunt, managing partner of Results International, in an article at The Drum about the Facebook valuation:
For something to be worth over $100bn and still be in a reasonably early stage in its development, you'd want to be confident that there's some massive growth opportunities. I think the opportunity for it to grow at $150bn or $200bn is seriously limited.
Personally I think there's a real danger that Facebook is starting to peak. Its most recent quarterly revenues were down on the previous period. There's also various comments around about how the revenue comes from advertising but the advertising doesn't really work when Facebook is used in mobile devices, which is increasingly where internet usage is coming from.
So if I was investing in it I would wait for it to go up 10 to 20 percent and then take the profit and not hang on for the longer-term.
I think there is a real danger of another bubble around this. Not a dot-com bubble of the nature we saw in 2000-2001, because dot com's here to stay and will continue to grow, but within that companies can get overhyped. For me it was a massive danger signal when they paid a billion dollars for Instagram.
They were a bit too willing to spend $100bn to fix a problem when $100m might've done it. When they see their own business valued at $100bn it's easy to think nothing of spending $1bn on something else.
Good point. The money being tossed around this Facebook deal is phenomenal. Central banks, in fact, have printed so much money over the past four years that some of it has got to go somewhere.
Some of it has gone toward Facebook.
There will be plenty of analysis over why Facebook is worth so much. Few will conclude that the valuation is simply another manifestation of central bank overstimulation of the money supply. But there were several large dotcom deals last year – and now this.
Conclusion: Free-market economists will likely have a different view. This Facebook deal may mark either the beginning or end of another dotcom go-round – yet another speculative bubble brought to you by the good, gray bankers of the Federal Reserve and Bank for International Settlements.