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Wednesday, May 23, 2012

Facebook Stock Beat-down a Mark on Social Media?


Experts continue to provide their opinions on why Facebook's IPO was a failure and what it means for social media and engagement. I was taken aback by one analysis in particular on AdAge.

The argument is basically this: Facebook is all about engagement, so the the stock drubbing is a sign that the market does not believe in engagement.

The author cites examples of limited engagmement success metrics as well as the transition to modern marketing where consumers have more choices to engagement. The article author seems to believe that a weakness in the engagement model translates to a direct distaste for the stock.

I have a more simple way to look at the stock drubbing. The price is too high. If there was no market for Facebook's services, it wouldn't have somewhere near 900M users. There is clearly some value provided by the company, but with all stock, the question is perceived value - one of the cornerstones of branding and marketing. Stocks have no inherent value - a share is a proxy of the perceived value of a fraction of the company that can be bought and sold. If people believe that a company has less value than the summed value of it's shares, people sell the stock and drive the price down. If you believe that a company has more value than the price of the stock, you tend to buy. In both cases, the buyer or seller is betting on market value of the stock, not necessarily the value of the products or services from the company.

To clarify this perspective, another article that states the issue directly. Facebooks Price-to-earnings (P/E) ratio was over 100 when it was priced at $38, compared to Apple with a P/E ration of 13.6 and Google at 18.2 as stated in a CBSNews article. In this comparison, Facebook stock looks way overpriced, regardless of the actual value delivered to users. At a P/E ratio at least 5x of some other popular high flying brands, Facebook will have a hard time supporting a multiple that high in the long term.

I can see the value of Facebook as a service as it helped foster new and past friendships as well as introduced me to new products and services. I have seen it enhance brand engagement for local businesses and major retailers and product providers. I have also not yet found a way to justify a 5x multiple over Apple and Google. The stock drubbing is not a social media condemnation, but simply a reflection on price.

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