In January 2011, I wrote what was at the time an outlandish prediction: that Facebook Will Be The Next $100 Billion Company. While I was right about the outcome, I was wrong about was how it got there: it got there out of pure growth of users and riding investor enthusiasm and pent-up Wall Street demand. And that is not a good recipe for Facebook out of the gates of their IPO; it is going to be rough waters ahead. Here are my 6 Post-IPO Facebook predictions.
1. Facebook Will Not Be Toppled
I want to make clear that as bearish as my predictions may be around valuation and expectation, I am equally confident that Facebook is not going anywhere. The network effect – where the more people that use it increase the utility for everyone – is past the point of no return, so expect it to be ingrained in more aspects of the products and services in our lives.
Today you see Facebook friends’ reviews rise to the top in Yelp and TripAdvisor and your friends’ song choices in Pandora and Spotify, and this is just the beginning. Facebook is here to stay.
2. Facebook Is Already Overpriced, So The Stock Doesn’t Have Room To Grow
Google had 2011 revenue of $37 billion in 2011; Facebook had revenue of $3.7 billion. That’s a whopping 10x higher, and yet at $200 billion, Google’s market cap is only double the $100 billion Facebook is going to IPO at.
The takeaway with this enormous disparity is that Facebook’s value (much to the delight of employees and early investors) has already created a bloated valuation. The flip side is that Facebook needs its growth of revenue to play catch-up to its valuation, which implies that buying at today’s valuation is buying high. Some IPO buyers may enjoy a quick profit if the euphoria of the IPO lasts, but it won’t last until the next quarterly earnings, so I am a firm “sell” at today’s valuation.
3. Revenue Growth Will Fail To Meet Expectations
For Facebook to meet expectations (or even justify its valuation today), revenue needs to grow, a lot. But in Q1, its revenue growth slowed from 90% in 2011 to 45% in Q1 over last year.
I believe that Facebook will look to increase revenue by growing its user base, showing more ads, creating more engaging ad units, monetizing mobile and launching an ad network.
Without a doubt these will increase revenue, but if the gold medal barometer of success is to be the next Google, Facebook has to grow by 1000%, and I do not believe these initiatives combine to remotely create that sort of extraordinary growth.
4. Monetizing Mobile Will Not Be Facebook’s Revenue Silver Bullet
One of the most lauded strategies that Facebook bulls point to is that there are no ads on mobile, and half of all users use Facebook on mobile devices. While that is absolutely true, and adding ads will most definitely add revenue, it is in no way the silver bullet that some would lead you to believe.
The reason is alarmingly simple: there simply is not enough screen real estate on mobile devices like iPhones to add much in the way of ads without severely adversely affecting the Facebook experience. That is the only reason we do not yet see ads on mobile devices today. In order to prevent ads from destroying the experience (or just drive users to use third-party apps that access Facebook with less invasive ads), ads need to be minimal and non-invasive, which in turn implies that it will not be a significant driver of revenue. So mobile ads is not the answer.
5. Facebook Will Launch An AdSense-Like Ad Network
Facebook launching an ad network was the thesis of my argument last year on justifying Facebook’s eventual $100 billion valuation. I still think this is the greatest asset and opportunity that Facebook has, and still nobody is talking about it.
The concept is simple. Google generates enormous amounts of revenue (some 30%, or over $10 billion last year) from showing ads not on Google.com, but third party sites, from mainstream news sites to blogs. Google shows ads related to the content on those sites. Facebook, if they were to do the same, has access not just to contextually match ads to content, but to tap into a truly enormous wealth of data based on everything they know about you, from demographics to anything you have ever “Liked”.
So why hasn’t Facebook launched this yet? I think the answer is Zuckerberg himself, who in his IPO letter declared, “we don’t build services to make money; we make money to build better services.” And the ad network that I describe is not a service, but a vehicle to make money through and through. If their priorities change or Zuckerberg bends to meet investor demands, I bet we see this product launched. But as it stands now, unequivocally…
6. Facebook Will Not Be The Next Google
Fundamentally, the Google experience is to search for products, services and information and then be connected directly to what you are seeking. The brilliance – and runaway success – of Google, boils down to the “product” they provide being so tightly intertwined to how they make money.
Facebook is far more like TV than Google. Granted, Facebook has amazing granular targeting and far more data to pull from, but they run into the wall that the value of their “product” – interacting, communicating and posting pictures – is diminished, not enhanced, by the advertising that is their revenue model. The fact that the user experience is not tightly linked to the advertising implies less relevant and effective advertising than Google, and GM pulling all of its Facebook advertising just days ago should send shivers down the spine of new Facebook investors.
All in all, have no doubt that Facebook is and will continue to be an integral and growing part of our lives, the way we communicate, share and explore. And as such, they will be a powerful and successful company in the long term.
However, in the relatively short term view of the “post-IPO”, their sky-high expectations will come back to haunt them in the eyes of Wall Street and the average investor hungry to get in on the action. That party ended before the rest of the world got the invitation.
Agree? Off-base? Now’s the time to sound off and comment!