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Facebook Shares Going for $38 a Piece: But is It Worth It?

Posted on the 18 May 2012 by Periscope @periscopepost

Mark Zuckerberg, 28-year-old Facebook founder, is a rich man after social network hits $38 a share.

Mark Zuckerberg, 28-year-old Facebook founder, is a rich man after social network hits $38 a share. photo: deneyterrio

The background

On Friday, 28-year-old Facebook founder Mark Zuckerberg remotely rang the bell for the start of trading at Nasdaq from his Silicon Valley fortress – signalling the social networking site’s first foray into the world as a publicly traded company. Trading as “FB”, and with the largest technology company initial public offering (IPO) in history at $100 billion, the individual share price stands at $38, up from the $28 to $35 offered earlier in the week.

So, is the share price worth it? The hype and the company’s uncertain future has many people worrying.

Overpriced and overvalued?

The Guardian reported that “the hype surrounding the launch has drawn scepticism from some analysts”. The paper flagged up comments from Sam Hamadeh, founder of the analysis firm PrivCo, saying he “has argued that Facebook is worth a fraction of the estimates”. On the company’s website, Hamadeh says that at $34 to $38, Facebook is “overvalued”, citing Facebook’s “slowing growth”. The Guardian’s Dominic Rushe confirmed that in its most recent quarter, Facebook’s growth had slowed from the previsou quarter (to 44 percent), and noted that Facebook would need “to take a quarter of the online ads in the entire world to justify its present price.”

Analysts sceptical about Facebook’s growth potential

Many commentators are sceptical that Facebook can continue to maintain a good return on investment for its shareholders. The Computer Business Review claimed that Facebook is “immature when it comes to advertising, which is problematic since it’s where the majority of its revenue come from”; other have noted that a real challenge for Facebook will be maximising advertising revenue without alienating users. Forrester analyst Nate Elliott wrote on his blog: “We wish… that a new focus on becoming a grown-up business would inspire the company to put even half the energy into serving advertisers that it does into serving users. But we doubt Zuckerberg’s going to wake up any day soon having acquired a taste for advertising, or even a proper understanding of it.”

Investors running for the hills

Dominic Rushe also observed that “Facebook’s early investors are some of the most successful in Silicon Valley, and on Wednesday a lot of them decided to dump a lot more shares”, which makes the environment seem risky for new potential investors.

A hole in their business model? No mobile monetization plan

By their own admission in the company’s stock market prospectus, Facebook cannot make any money from their 425 million mobile users due to the lack of advertising on this platform. In the prospectus, they say that if Facebook was “unable to successfully implement monetization strategies for our mobile users,” the company’s revenue growth could be harmed. The Guardian observe that “Life moves quickly online. Facebook is a product of the laptop/PC age. It’s not yet proven it can make it in the mobile era”, whilst the LA Times agree, saying “the absence of a strong mobile advertising platform could prove to be the social network’s Achilles’ heel”.

How Zuckerberg reacts to float is key

The Guardian argued that the fate of the company’s future relies on how Mark Zuckerberg, the company’s largest shareholder, reacts to the flotation: “Wall Street investors soon tire of wunderkinds who don’t deliver quarter after quarter after quarter.” Of the decision to open the Nasdaq from Silicon Valley, they say “it’s clear where his loyalties lie”. It remains to be seen whether the company will stay true to its “Move Fast and Break Things” hacker culture mantra after its flotation.

Potential upsides for investors

Despite the negative hype surrounding the flotation, PrivCo also cite Facebook’s “user stickiness”, their huge network effects, the potentially huge untapped market of “500 million internet users” in China, and the Facebook App Centre as unmodelled areas for growth in the future. This, combined with the fact that the company is only 8 years old, could tempt investors.

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