Protean

The facebook valuation is crazy. Can shares in a business with limited tangible assets be worth that kind of money? Based on what I’ve been reading over the last week, we’re talking of a 50x PE ratio. That surely assumes that earnings growth will continue to accelerate. Making this kind of assumption has to be risky.

Aren’t we forgetting the one thing that provides facebook with any kind of revenue at all?…

Users.

Unlike other high flying tech companies Apple (13x PE) & Google (20x PE), the only commodity that facebook has is it’s users. But unfortunately facebook doesn’t own them. They can’t be copyrighted or patented, they are fickle and prone to mass psychology. If users aren’t updating their statuses then suddenly facebook is no longer an interesting place to be. What happens if facebook’s only commodity decides to move on?

Google continues to prosper, because it is a fantastic tool to deliver information. It is a vehicle. Users use Google to take them elsewhere. It does a great job of integrating all the information you want from the web and delivers it to your screen in a variety of ways. Facebook on the other hand is the destination. It only has value if people keep continue to update it and if those people’s updates are of interest to you.

One of Apple’s biggest assets is it’s brand. It is (arguably) synonymous with quality and beauty. It seems to transcend mere fashion in the same way as a Ferrari or an Omega watch. It inspires fierce loyalty in a huge percentage of the tech lovers who buy the product. It’s trusted. Can you say the same about facebook? People who have an account are just one amongst 900 million others. Being a facebook user is not exactly a profound personal statement. Does it inspire loyalty? Not in my opinion. Do people trust it? Well to a certain extent they must do as they are signed up, but they are weary.

Apple & Google also have their hardware and operating systems - tangible products that deliver something of benefit to their owners. Their products are patented and cannot be reproduced by others (or so the theory goes). What does facebook have to compete with this? Nothing (yet). Both Apple & Google have infiltrated the market in a way that keeps users of their products coming back for more. If you have an iPhone, you will probably use the Apple store to buy your software & media. If you have an Android product you will probably buy your media and software from the “Play” store. Does facebook have this kind of hook? I don’t think so.

I’m not against facebook. You’ve got to be impressed with their story so far. But the speculation surrounding this IPO is madness. How can people have forgotten the dotcom misery of the noughties so quickly?

This entry was posted on Friday, May 18th, 2012 at 1:12 pm and is filed under Nuggets. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.