AU MA Social Media

A class blog about social media.

Facebook: Shooting Star or Emerging Sun?

Posted by nigeriaveritas on August 9, 2012

In a space of twelve months, a team of  seductive Investment Bankers and Publicists led by Goldman Sachs and Madison avenue’s best started a PR blitz about Facebook. For good measure, they surreptitiously brought Hollywood to the picture (no pun intended), resulting in the blockbuster movie: The Social Network.

At the peak of the Facebook fever, analyst after analyst declared that Facebook is the future and expected it to eclipse Google. Financial analysts and software Geeks, cited number of users and dubious projections of Social Media consumption patterns as evidence of this impending change of guards.

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Unsurprisingly, Facebook’s IPO was massively successful, giving the company a $108 billion valuation. At that value ($38/share),  FB enjoyed much higher earnings multiples than Google!! Google is valued at about $198 billion, despite a proven revenue formula, outstanding performance, and market leadership in a diverse number of segments. google sell cell phones, operating systems, apps, search-based adverts, electronic sales settlement (cards) and

De ja vu? Yes, we have been down this road before. Remember the dot.com bubble which the sage, Alan Greenspan rightfully called “market exuberance”. Amazingly, a country with probably the largest number of smart Lawyers, Financiers, Investment Managers and Publicists; fell for the same trick TWICE.

I spent an hour lecturing a couple of Investment Managers at Morgan Stanley who sought to convince me to buy FB shares and ended up revising their expectations. A few interesting facts:

1. Facebook is purely a social network. While FB might have plans to expand to other areas, it remains primarily a social network.

2. The closest company to Facebook in form, is MySpace (at its peak). MySpace today is a fallen Angel and went from a  $17 billion valuation in 2007 to $35mm in 2012.

3. Myspace and Yahoo still have the most sophisticated targeted ad capability (Google is likely to surpass them with its recent offerings) yet they ultimately succumbed to a stodgy revenue model and weak management.

4. In stark contrast to Google, Intel, Microsoft or Apple, Facebook’s management is inexperienced and concentrated.

5. Google used search to redefine computing; used Android to redefine the smartphone industry, crushing Nokia and Blackberry(RIM), while overtaking Apple in the process; used Youtube to redefine communications; used G-mail to pension-off AOL, Hotmail and Yahoo  mail; Is competing fiercely n the browser space with Chrome; is now challenging physical payments systems with its new mobile phone swipers for debit/credit card readers. With such a diverse source of income and track record for innovation it is unlikely to lose all round.

Facebook has already fallen short of its projections for the first full quarter post-IPO. The company has lost over $30 billion in value since the IPO.

Will FB survive? In my opinion the company faces to likely possibilities (1) Remain a dominant social network but revise revenue to more realistic levels- in my estimate $10-20 billion (2) Get squashed in one of the ruthless frequent industry realignments.

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