Why the Facebook IPO failed

Social networks are recreation for the young. Businesses require paying customers. Photo: Paul Walsh (Flickr)

LOS ANGELES, May 25, 2012 — Despite being one of the most hyped Initial Public Offerings (IPOs) of all time, the Facebook launch on the NASDAQ was a debacle.

While there were glitches that caused heartburn for many short-term traders, the real problem with Facebook is in its long-term business model. The big investment banks don’t like the stock, and with good reason.

Putting the epitaph on a company that just went public would be totally premature, especially in this case. Mark Zuckerberg is a bright young man who took an idea and became a billionaire.

Yet when Facebook dropped from its $38 IPO price to $32, the story was far from complete. As of the close of business on Thursday, May 24th, 2012, Facebook was still trading at 100 times earnings. Those who follow CNBC or Fox Business Channel know that a comfortable P/E ratio is 14 or 15 times earnings. While the internet stocks of the 1990s often had no earnings at all, Facebook actually is in the black. However, with earnings of 30 cents per share, Facebook should not be a $32 stock. It should be less than $5 per share.

That’s right. If the market were to judge Facebook not a a potential promise but as actual worth today, the stock should be trading around $4.50. It could lose over 85% of its current value (90% from the IPO price) and still have room to fall further.

This is not a prediction, and underestimating Mark Zuckerberg is not a bet worth taking. Yet the reason why Facebook became the largest social networking site in the world is the very reason it could face severe obstacles to success. There is one reason why Facebook could fail, and this failure already exists in other industries.

Facebook treats young people as the most important people in our society. From a business standpoint, they are not. They are the least important. When Whitney Houston sang that our children are the future and that we should “let them lead the way,” it did not mean they should be given over-inflated senses of self-worth without the accomplishments to match.

Facebook is simply not the first entity to put its hope in young people and find disappointment.

Ben Shapiro wrote a book recently about Hollywood where he discussed the Big Three networks. A few decades ago, ABC was in last place. They had the fewest advertisers. The head of ABC told the world that while NBC and CBS had more advertisers, they did not have the “correct” ones. The issue was to have younger customers. Somehow everything turned to what 18 to 49 year-olds were thinking, and anyone age 50 and over was discounted.

This insane practice continues today. Older people have all of the money, yet marketing executives insist on targeting the youth.

In political circles, an entire 2012 movement was based on the idea that screaming college students mattered. They were the next generation, and would lead a revolution. The students screamed, and the rest of the voters shrugged. The campaign remains a cult favorite for young people while most adults remain uninterested. Kids show up to rallies and hold signs, but campaigns need donors to write large checks.

The same conundrum holds true with Facebook. Facebook began as a way of connecting the world, and catered to the youth of the world. It would be free forever. Advertisements were the source of revenue for the company.

Yet Facebook could not change societal habits. Young people do not have money. They don’t buy stuff in quality and quantity to satisfy most advertisers. General Motors figured out that young kids playing “Farmville” are not going to be purchasing $50,000 automobiles. Most of the youth only click on the advertisements either by accident or to make them go away.

Facebook has insisted they will never charge people to use their site. Yet relying on advertisements can be shaky. They need new revenue streams.

Zuckerberg insists that Facebook was created to be a social network, and not a business. Well, now Facebook is a business. Wall Street is not Farmville or Mafia Wars. Wall Street is the big time. Children need not apply. So either Facebook finds a way to get adults to part with their money, or it will enjoy life as a penny stock.

It is time to stop obsessing over the youth. Adults built this country, and adults maintain it. Young people eventually grow up, but Facebook does not have the luxury of time. Shareholders are impatient, and Facebook needs to mature in a hurry to avoid being just another youthful ideal to get crushed in the real world.

 

Brooklyn born, Long Island raised, and now living in Los Angeles, Eric Golub is a politically conservative columnist, blogger, author, public speaker, satirist and comedian.

Eric is the author of the book trilogy “Ideological Bigotry, “Ideological Violence,” and “Ideological Idiocy.” Eric is 100% alcohol, tobacco, drug, and liberalism free. After years of dating liberals, he has finally seen the light and now only dates Republican Jewish women. His family is pleased over this. Republican, Jewish women, you may contact Eric above.

Follow Eric on Twitter @TYGRRRREXPRESS

Eric Golub is an independent writer for the Communities. Read more from Eric at his TYGRRRR EXPRESS blog.


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Eric Golub

Eric Golub is a politically conservative Jewish blogger, author, public speaker, and comedian. His book trilogy is “Ideological Bigotry,” “Ideological Violence,” and  “Ideological Idiocy.” 

He is Brooklyn born, Long Island raised, and has lived in Los Angeles since 1990. He received his Bachelors degree from the University of Judaism, and his MBA from USC. A stockbrokerage professional since 1994, he began blogging on March 11th, 2007, the three year anniversary of the Madrid bombings and the midpoint of 9/11. He has been inflicting his world view on his unfortunate readers since then. He blogs about politics Monday through Friday, and about football and other human interest items on weekends.

 

 

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