The Facebook piñata is ready to burst
Wednesday, May 23, 2012 at 1:10PM Jay Yarrow at Business Insider featured Facebook on Tuesday's CHART OF THE DAY. It's not even a week and the stock has already dropped 18% from its IPO price, "losing over $15 billion in market cap". The Facebook IPO hype went into overdrive, and without a product to sell, I wonder what were investors thinking?
These are smart people, so the only logical explanation is speculation; this seems to be the current modus operandi on Wall Street. CNN is reporting today that a group of investors are suing Facebook, Mark Zuckerberg and Morgan Stanley, accusing them of withholding information about Facebook's IPO.
We have yet to see how this story will unfold, but there is no question in my mind that the overhype and speculation were part of the game investors were playing. Henry Blodget at Business Insider offers a thorough analysis about what Facebook is actually worth; if you want to save the link for later, Blodget places a "fair price for Facebook ... between $16-$24".
Advertising is not making money for Facebook and their best option for generating revenue is "monetizing" subscribers. This sounds interesting until you consider the can of worms it opens up for privacy issues; this is what makes Facebook valuable but it can also make users turn away from Facebook.
This seems to me the most likely scenario, and I think this will happen sooner rather than later. A few people will become insanely rich, many others will lose tons of money, and subscribers will move on to the net big thing.
In my opinion, Facebook is poised to become Wall Street's latest and largest casualty, its bubble seems ready to explode faster than a piñata during posada season. We probably won't even have to wait for the first posada in mid-December for this.
Raul
Aswath Damodaran, Professor of Finance at NYU, wrote a piece today for Forbes in which he states the following: "Yes, Facebook can be valued. Facebook is a company with tremendous potential, with two key drivers of value: an immense user base and unparalleled information about these users. The question is whether they can convert this potential into profits, and if so, how quickly."
Translation: how to monetize subscriber base, effectively, to generate revenues that will make investors happy.
Bottom line: Facebook IPO overhype, stock price overvalued, still "not a buy".
Raul |
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