Facebook continues to make the news for all the wrong reasons. Last night Facebook share price dropped below $30. At $28.84, that’s a 24% fall since the IPO; wiping some $25b off Facebook’s value.
In our now much quoted Feb 12 post – The $100b Facebook Question – we basically said that Facebook was considerably overvalued. We pointed out that all tech companies ultimately traded at P/Es in the range 10-20. Facebook could not be an exception. If you assumed that Facebook would reach that valuation metric in 3-4 years hence, then a ‘fair’ valuation today (even allowing for some pretty massive growth in the next few years) would be between $27 and $57b. I repeat this was not a share tip (or a sell tip!) It was just a scientific calculation.
I guess one of the reasons why my post has been quoted so often is that the valuation I suggested is now pretty widely accepted! Indeed, it now looks more than likely in the next few weeks. No wonder all the ‘smart’ money is on shorting Facebook. Today Bloomberg published its own evaluation – Facebook seen dropping another 20% to gain parity with its NASDAQ web rivals. Reuters also suggested a $50b valuation in today’s post - Facebook plumbs new depts – Valuation questioned.
Back in Feb, I was actually quite bullish about Facebook’s prospects as a company. But since then there has been a lot of new ‘news’ that I would put on the bad news pile. Zuckerberg’s disregard for good corporate governance, the huge sum it was prepared to pay for Instagram, the very bad news on its mobile advertising prospects. In the UK, many of my friends agree with me that the ads on their home page are US-based and therefore totally irrelevant to them. Now we have rumours that Facebook might be about to buy a mobile phone maker – even RIM has been suggested. Or Opera Software? An immature company making a leap far, far outside their comfort zone would need a lot of luck to be successful. Indeed odds, based on every other such ‘move into the dark’, are that it would be disastrous.
Given that Facebook raised $16b in its IPO, it can hardly be considered a failure. But its share price dive post IPO is unprecedented for any large scale IPO. It will take a long time to shake off that negativity.