Facebook IPO – Biggest Boondoggle Of The Century

May 16, 2012 1:24 pmViews: 27


Are you just waiting to invest in the Facebook IPO with the hope you are going to cash in? Well, lots of people are, but you just might want to take a look at what's going on here and before you put your hard earned money into the next big thing. Sure, Facebook is already the next big thing (it has been for several years) but, is it really worth what this IPO expected but not confirmed date of May 18, 2012 will place it at?

Facebook is going to sell 337.4 million shares at $28 to $35 has now been raised to $34 to $38 per share each which means Facebook could make $11 $13 248billion right up front. But, if you take the average of that share price and multiply it out to the total 2.48 billion Facebook shares in existence, we have a $78 $89 billion valuation. Of course, hype will bring that valuation even higher. And this is for a company that had sales, not profits, of $1.06 billion in the first quarter of 2012. The profit on those sales was $205 million, a 12% loss from the previous quarter. Say WHAT! You want to sell your stock at a price that will value your company at 28 times your sales and 100 times your profit for the year? That's 3 to 4 times the valuation the Google IPO had.

Okay, well maybe Facebook has some kind of magic mojo that Google doesn't? Well, not really. The majority of Google's revenue comes from its advertising base, you search and then you click on either a search result, or an ad. Facebook isn't like that. It is a social network where people share all kinds of happy stuff, play time wasting games and advertising is a distraction for most people. In fact, most people hate to see ads on their Facebook wall.

Yes, Facebook has 500 million daily users and a base of 900 million members, but they aren't buyers or ad clickers to the extent they are on Google, they share happy gardening stuff and what's cooking for dinner with their friends, they hardly click ads. For example, a good click through rate on advertising with Google is around 3%. With Facebook Ads a good CTR is, are you ready for this, 0.1%. We are talking about a good CTR that is 30 times less than Google. That doesn't translate easy to lots of money like the big G is now earning. So, comparisons of Google's IPO being over valued and still making people rich vs Facebook doing the same thing don't even begin to take this factor into consideration.

And now we get into how ridiculously cumbersome it is to get ads approved on Facebook vs Google. Being both a Facebook and Google Adwords advertiser in the past, I do have some experience here and believe me, Facebook is a nightmare when it comes to getting ads approved. The approval process is automated on Google and their algorithm looks at where you are sending ad clickers (called your landing page) and grades it on relevance to your ad. So, when you place and ad with Google, it either works or it doesn't based on relevancy. With Facebook Ads, every single ad has to be looked at by a human and depending on how they feel that day, you ads may get approved, or not.

Apparently, Facebook values their user's experience more than they do the revenue that actually pays for the money venture capitalists have pumped into the social network and they have a track record of not giving a rip about their advertisers. In fact Zuckerberg has said, “We don’t build services to make money; we make money to build better services.” Nice Mark, that will earn you guys a lot of money for people pouring their money into your IPO.

Another thing the pointy headed MSNBC analyst types who are hyping the Facebook IPO don't realize is that the click thru rates I mentioned earlier continue to plummet based on the age of your ads on Facebook. With Google's search and contextual based advertising, you constantly have an influx of new eyeballs looking at your ads every day. On Facebook, your ads are shown to the same demographic you pick out over and over so they suffer viewer fatigue much, much faster than your ads on Google will. I have heard of people profiting with the same ad running consistently on Google for more than 2 years. That will never happen with Facebook and consistent profits on Facebook require discovering new demographics and constant maintenance and updating of ads.

Honestly, I could be entirely wrong here (there, that's my disclaimer), but I wouldn't dare put my money in Facebook's IPO. It is the biggest boondoggle of the century, IMHO. It is hugely over valued so much so that Mark Zuckerberg and company have to parade around the United States to convince big investors what a great value the stock is going to be. Zuckerberg and his cohorts time would be much better spent making their advertising platform suck a whole lot less. You know, work on what actually drives revenue.

Maybe $15 a share would be a better price for their stock during the IPO and then we could let the market decide the real price.

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