The IPO of Facebook and A Falling Stock Price: What It Means

Since Facebook’s recent IPO on May 18th, the stock price has overall declined.  As of June 6th the stock was trading at 26.81, down over 40% from its initial opening price of 42.05 .  Is this a sign that the almighty Facebook is fallible?  A beginning to an end?  Not so fast we say.  IPO pricing, especially in the tech industry, is often a shot in the dark.  Below we dig deeper into the pessimistic reports we have been hearing.

Many of these comments are coming from the fundamental financial analysts of the investment industry.  Basing their Facebook predictions off the past trends of other once popular online sensations such as AOL and MySpace, there is an “even Rome must fall” mentality.

One idea is that there will always be something newer and better to jump ship to.  In the case of a social networking site with over 1 billion users, we believe this won’t happen as it’s a unique situation.  A social networking site is different from any other business in that everyone is connected with others and the main reason they are there is to communicate with acquaintances.  For another social networking site to take over, it would need to convince a Facebook user and most of his/her “Friends” to switch over to their new platform almost all at the exact same time.  Given that Facebook offers a decent interface and most of the needed communication features, this is highly unlikely.  We have already seen this to be true, as other social networking sites such as Google + haven’t been able to gain any real momentum.  Between Facebook, Twitter and LinkedIn, does anyone really have more time for a new network?

Another concern to investors is the fact that GM stopped advertising on Facebook and publically stated that the results weren’t worth the money spent.  This is a legitimate threat to the future advertising profits of Facebook. However, it’s hard to determine how strategically thought out these larger companies Social Media campaigns were.  We have seen many large companies blindly throwing large amounts of money into producing online content that often gets lost in the clutter and goes unnoticed.  The Wall Street Journal stated that GM budgeted $30 million on content such as Page management.  That seems quite excessive, regardless of how large a company is.

The third major threat against Facebook is their mobile app experience which has been called sub-par.  Forecasters predict mobile app usage will soon dominate all other forms of computing.  Web-based companies such as Facebook will wither away as new, innovative mobile based apps become the area where consumers allocate most of their time.  We agree the Facebook mobile app isn’t the best and know it hasn’t implemented advertising yet to increase revenue streams.  But come on, mobile apps can be built for peanuts compared to the mountains of cash Facebook has access to.  You can be assured they haven’t forgotten about their mobile app and we expect some major updates to it sooner than later.

Whether some, even major brands, find Facebook advertising to be unprofitable is irrelevant.  At the end of the day, the general public chooses to spend a ridiculous amount of time on Facebook, and for this reason, there will always be some form of revenue generating option available.  True the IPO valuation may have been a bit lofty, but Facebook isn’t going anywhere and we believe their stock is a good long-term buy and hold.

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