Sorry Facebook, we were right

To quote from our earlier post at the start of June “We queried the logic of this float and the price in March in our article Facebook: Over Hyped, Over Valued, Over Subscribed (the clue was in the title folks) and wondered then about the advertising model that this entire edifice is built upon.“

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Today the shares, which were priced at $38 a share for the float in May are languishing at half their value, trading at $19 currently on Nasdaq. So what went wrong? How did so many people get it wrong and is Facebook really only worth half its float valuation?

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Facebook LogoThe stock has been one of the most traded on the markets since floatation and with the ‘lock in’ for staff members expiring last week, allowing them to start selling their shares, another 10% was wiped off the company value. The press is now awash with stories of large investors ditching the stock and the remainder of the staff and indeed Mark Zuckerberg himself will all be eligible to sell more stock in November, which will in all likelihood see even more cash wiped out.

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The problems that we discussed earlier this year have simply not gone away in that other than their advertising, which doesn’t work on mobile platforms, they have failed to come up with any creditable long term revenue streams. Companies advertising on Facebook continue to report poor returns on their investment and higher bounce rates than other comparable pay per click advertising.
So what went wrong?

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Well, in terms of the business, nothing really, it’s still the same business it was at the start of this year before the IPO. What has happened is that the pre IPO media ‘hype’ has turned into a media ‘hangover’ with people queuing up to take a pop at the business. The reality is that nothing has changed and the fundamentals of the business still remain intact, it’s just that now it appears to be more realistically valued. Does this mean an end to the decline in the share price? Probably not. How much further can it and will it fall? Until it reaches a point where the market capitalisation matches a business with its turnover and prospects, and only the markets can decide that.

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Of course the more optimistic observers point out that acquisitions like Instagram will help to diversify the business and the internet is notorious for turning up business that go from start up to million dollar enterprises in a couple of years, so anything could happen. Yes, it could happen but in this case it’s unlikely.

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Facebook was, and remains, a great way to keep in touch with people whom you don’t see every day or week and allows for some pretty neat communication between you and them. It’s a tool for catching up. It’s a tool for being social. It’s not a tool for business. People go there to chill out, to be distracted, to be amused. They don’t go there to go shopping. As long as you control what you put on Timeline (which the Chinese are now claiming was their invention anyway….) it can be a nice addition to your life.

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So use Facebook, enjoy Facebook, but don’t expect the share price to go north anytime soon.