Duh on you if you bought the Facebook (NASDAQ:FB) IPO. Double duh if you’re thinking of buying Facebook stock now that it’s fallen to $32 a share and lost $17.16 billion off its initial $104 billion valuation. The company is only worth about $7.50 a share.
And, no. That’s not a typo. There is no missing zero or a placeholder. That’s reality.
What is ludicrous is that Morgan Stanley (NYSE:MS) and Facebook executives thought the company merited a $104 billion valuation at 100 times earnings. As my good friend Barry Ritholtz pointed out recently, both Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) debuted at about 15 times earnings. Today they trade at 13.6 and 18.2 times earnings and 3.75 and 4.9 times sales respectively.
As I type, Facebook’s market cap is $86.84 billion and its price-to-sales is ridiculously high at 21.01. I think that’s way out of line.
So what should the numbers be?
Try this on for size. If we use Google’s price-to-sales ratio of 4.9 (and I am being generous here for discussion purposes), that equals a total market cap of $20.24 billion, or 76.68% lower than where it’s trading today.
With 2.74 billion shares outstanding, that’s equal to only $7.39-$7.50 per share.
No doubt I’ll get the evil eye from the Facebook faithful and Morgan Stanley for saying this, but think about it.
Revenue already is slowing, and the company does not and cannot possibly dominate the mobile markets that are becoming the preferred channel for millions of people. Worse, startups already are cannibalizing Facebook’s user base as concerns over privacy and who-likes-who mount.
Companies like General Motors (NYSE:GM) are deciding not to renew their advertising. This is going to hit Facebook to the tune of $10 million a year for the loss of GM alone. More undoubtedly will head out the door for the same reason, since Facebook friends don’t necessarily translate into revenue.
Corporate buyers are beginning to figure out that advertising on Facebook simply is not cost effective versus other media alternatives — gasp — including good old-fashioned television and radio advertising, billboards and trade shows.
Facebook Stock: At the Mercy of the Merely Curious
Many people think this isn’t a big deal. They couldn’t be more wrong.
Facebook serves up its ads while you’re kibitzing about your latest trip or checking out pictures of your family’s newest arrival. This is very different from how Google works, for example. Google’s adverts appear after a customer has already entered search terms and refined the results they want to see. Facebook’s approach is like pissing in the wind — and about as effective. In practical terms, what this means is Google search advertisers know that those who click on their ads are already hunting, so they’re willing to pay a few hundred dollars to acquire a paying customer.
Facebook advertisers, on the other hand, are at the mercy of the merely curious. That means the acquisition cost can be dramatically higher, perhaps even into the thousands of dollars. There are very few business models and products where that kind of marketing expense is “worth” it.
That’s badly flawed — the Internet equivalent of signing somebody’s yearbook in high school.
According to the technology savvy wunderkids at Facebook, “likes” are supposed to open up a magnificent relationship between prospective customers and the brands they “like.”
Maybe this worked at Harvard when you were talking about bars, people and local hangouts, but I don’t buy that it’s going to translate into real sales. So what if you become a company’s friend?
When you “like” something, you get a stream of information from the “likee” that appears on your personal Facebook wall. Go on a “like” binge one day, and suddenly you’ve got 20 or 30 streams of information coming in right next to pictures of your hot-rod buddies or school chums.
Over time, what happens is users tend to block out these streams in yet another never-ending battle to screen out visual vomit, thereby robbing companies of the very connection they crave.
Your initial “like” never goes away, but depending on the barrage of information you receive I submit that brand negativity actually builds up.
If I “like” a genre-specific museum that’s just opened up in town, I don’t want to see totally unrelated posts about nearby milkshake parlors issued by the museum in a pathetic attempt to keep their brand front and center on my “wall.”
The real measure of any business is how it handles the “dislike” button — but Facebook doesn’t offer that.