Friday, May 18, 2012

"Overvalued" & "over-hyped" Facebook IPO begins today

The day has finally come, that of Facebook's IPO. But beyond all the hype there is some cautious advice being discussed amongst investors.

As Friday's IPO launch approached there has been a flurry of reports discussing the merits and pitfalls of the largest social media platform and whether Facebook stock would prove to be a safe investment.


Much of the discussion has hinged on personality as well as the product. There was criticism over Facebook's founder Mark Zuckerberg's decision to arrive at the New York Stock Exchange in a hoodie, bucking the usual dress-code of a suit and tie.

One pundit Michael Pachter, a Research Analyst at Wedbush Securities, publicly denounced Zuckerberg's hoodie choice in an interview with Bloomberg, calling it a "mark of immaturity."

"He's actually showing investors he doesn't care that much," Pachter said. And this could prove disastrous in the long term if Zuckerberg is not seen as being more business like. Others suggested his wearing a hoodie was 'refreshing' and 'savvy' [CNN /].


It is not just popularity that attracts investors. They will be looking at Zuckerberg's business decisions and Facebook's profits. With a growing number of Facebook users accessing Facebook on a mobile device, the social network is losing advertising revenue. Users of mobile applications aren't bombarded with the advertising seen on the full version accessed via computers due to space limitations. And there was further worrying news after GM stopped advertising on Facebook saying the ads had little impact on consumers [Reuters].

The decision by GM, the third-largest advertiser in the United States, marked the first highly visible crack in Facebook's strategy and underscored doubts about whether advertising on Facebook works better than traditional media.

In fact, it is advertising that puts of many Facebook users. While Internet users searching for things on Google might appreciate advertising more subtly displayed on the right hand column of the browser, those visiting Facebook merely want to connect with friends and catch up with gossip - not buy products.


Companies such as Google, Facebook and others sift through user data and target relevant advertising. Google offer opt outs concerning some data mining, and of course one can always use Google while not signed in or in Chrome's "incognito mode". Nonetheless advertising will still be seen connected to a particular Google search.

While Google and Facebook have been singled out for such data mining, all the major search engines make use of user data in order to target advertising and increase revenues.

But issues concerning privacy on Facebook has raised concerns for many users. Facebook has been forced to readjust its privacy policies several times after a backlash from its growing user base.

With some 900 million users worldwide Facebook is attempting to soothe fears over privacy. Facebook is the subject of "numerous" class action lawsuits in the US, including some from users who claim that the company continued to track them around the web even though they had logged out of the main Facebook website. Analysts also expect the number of lawsuits to grow thanks to the publicity surrounding the flotation [Independent / Daily Mail].

Business decisions

Mark Zuckerberg currently holds a 55.8% voting power, but his recent acquisition of Instagram has raised many eyebrows after he paid $1 billion for the picture sharing app apparently without consulting anyone. And in another buyout, Zuckerberg has purchased London firm Lightbox, which makes a photo app for Android phones.

But while he has promised Instagram users he will keep the service going, Lightbox will no longer be allowing new sign-ups and current users will have until 15th June to download their pictures creating anger amongst some users [Daily Mail / LA Times].

New markets

One area which investors will be looking at is where Facebook will go next. One huge Internet market is China. But the social network faces huge challenges concerning its attempt to gain access to the Middle Kingdom's 500 million Internet users.

Speaking to Bloomberg, Richard Nunn of Charles Stanley Securities says that there is "no short term solution" concerning Facebook's entry into China. Facebook is widely seen as a platform encouraging freedom of speech and has been used extensively to promote causes from the Arab Spring to revolutionary ideas which would be unwelcome by China's leaders.

Even if Facebook could negotiate a way in, establishing itself in China might prove difficult with many already using home-grown sites such as Renren [BBC].


Zuckerberg has been quoted as saying "We don't build services to make money; we make money to build better services." [Forbes] But will such a philosophy, of the 29th richest person on the planet, attract investors? Bloomberg has already carried out a poll of some 1,250 investors and found that 80% thought the company was overvalued. "The next couple of weeks it's gonna rise," says Nunn, "But it may come down because of all the hype."

At $38 per share it makes Facebook worth some $100 billion. Facebook made some $3.7 billion in revenue last year and is set to make even more profit this year. The question is whether it's sustainable.

Another question might be whether anyone really need hundreds of friends. Facebook certainly has its fair share of 'friends'. Since its launch in 2004, Facebook's user base soared to 100 million in four years. By 2012 this had hit a massive 900 million.

But there is a feeling that interest has waned. The constant changes to the website has annoyed many users especially the recent introduction of 'Timeline' [BBC]

While Facebook has certainly been a success thus far, there is a feeling that hayday may be over. For some, Facebook is seen as passé, and with stiff competition from Google+ and other platforms such as Twitter it is unclear how long Facebook will remain the dominant force in social media.

[BBC / Sky / CNN / France24 / RT / Al Jazeera / Xinhua]

tvnewswatch, London, UK

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