As I read the fairly negative coverage of Facebook’s first quarter as a public company, I can’t help but feel they brought it all on themselves (with some able support from its bankers).
Facebook’s revenue growth was actually pretty impressive and exceeded almost all analyst’s expectations. The company reported revenues of $1.18bn, reflecting a healthy 32% increase on the same period last year; and their all-important monthly active users rose 29% to 995m. The company did report a loss of $157m for the quarter but this was explained by its exceptional IPO expenses; excluding these costs the profits were in line with expectations and up on the same time last year.
Despite these decent results, Facebook’s shares have tumbled by nearly 12% today with more and more questions being raised about the company’s business model, especially in mobile. Facebok’s valuation now stands at $50bn – almost exactly half the value it gave itself for the IPO in May.
I think that, between the company and their bankers, they drove the IPO price up far too high, and also sold too many shares with 57% being sold by existing shareholders. The valuation represented a multiple of 30x revenues and a whopping 100x profits. To put that in perspective, Google trades on around 5x its revenue and 20x its profits.
It’s also very unusual for such a large percentage of the offering to come from existing shareholders. In Google’s IPO only 28% came from insiders and in Amazon’s or Yahoo’s there was no insider selling at all.
All this points towards Facebook’s executives, shareholders and bankers getting greedy in the way they priced and allocated the IPO. It also suggests that many were less than convinced by the company’s prospects to ramp up its value beyond the $100bn mark.
Facebook is now seen as a company that was overvalued with no momentum behind its shares. When that happens there will inevitably be a huge amount of scrutiny on its quarterly performance and anything less that perfect will be penalized. This is what has happened today.
It could have all been so different. The company could have valued itself at say and $60bn, a level that would still have been more than 15x revenues, and really given itself and its shareholders something to build on. This would have still been a remarkable achievement for such a young company. They could also have sold a much lower allocation of shares and reduced the levels of insider selling leading to more pent up demand and less suspicion.
It’s too early to tell whether Facebook will go on to take its place as one of the true leaders in the technology world and live up to all the hype. But one thing is for sure and that is the company has made life more difficult for itself. It has put itself under the microscope and brought on all this short-term scrutiny – exactly what Mark Zuckerberg wanted to avoid when he talked about being focused on the long-term mission to connect the world together.
My only hope is that everyone has learnt from this.