Facebook is expected to file for its initial public offering today, with an initial placement of around $5 billion valuing the company between $75bn and $100bn. Should we (or our pension funds) all be piling in with our cash?
Not in my opinion.
Facebook is a fascinating company with a very successful product, as is clear from its 850 million users worldwide. I use it daily, as do most people I know. Facebook is also believed to be fairly profitable, with estimates ranging from $1bn-$2.5bn for 2011 — we won’t know for sure until it files.
But even if the top end of these estimates is true, it is being valued at 40x its profit. And I’m afraid I just don’t see it growing to justify those valuations.
To give you some context, total global spend on online advertising, the primary source of Facebook’s revenue, has been estimated in the region of $70bn. There are a lot of companies competing for a share of that pie. The valuations discussed put a premium of $100 on every one of Facebook’s users: when did you last pay for something on Facebook?
Most importantly for Facebook as an investment proposition though, is the fast-moving and fickle nature of the tech industry. You only need to look at once-lauded names like Bebo and MySpace (or Nokia and Blackberry) today to see how far and how fast user affections can shift. Innovation in this sector rarely comes from companies encumbered by shareholder expectations. It is the nimble start-ups driven by ideas and enthusiasm that tend to shift the market. Start-ups like Facebook once was.
For me the rot has already set in at Facebook. The platform reminds me of RealPlayer in the 2000s: a once-great product that became bloated and slow as time went by and the drive to extract revenue from its users became ever more imperative. I watched this change closely, as I was doing PR for RealNetworks at the time. Today Facebook has endless features and bolt-ons, and multiple pages of settings to tweak. As sleeker, slicker, less involved options come along I can see users progressively, even without consciously making the decision, slipping away.
For this reason I don’t expect Facebook to justify investment today — certainly not in the long term. It’s just opinion, and I may be proven wrong, but that’s part of the joy in predicting the future.