Well it finally happened on Friday May 18th, the biggest IPO ever. Facebook is now a public company and the good old days of the wild, wild west are gone for Facebook. They will now on a quarterly basis be held accountable to their shareholders, mainly big financial institutions. They will have to report earnings, disclose where the money is coming from, What their future prospects are. How will they combat competition.  Can they diversify or are they a one-trick pony.  In short all the fun is gone.   This was about as hyped a IPO us they come.  With over 900 million users  Facebook was big even before they hit Wall Street.  Their founder and CEO, Mark Zuckerberg was already a household name with an Academy Award nominated film about him (The Social Network).  He lost $2 billion on the second day of trading.  He will be in the Forbes Magazine top 100 richest people list for easily the next decade.    Yet despite all this hype by the media by day two of trading, Facebook was being called disappointing.   My view is don’t buy into what is being said, but this is time to pause and analyze what has taken place.

First you can always blame the Greeks, and so I shall.  Timing is everything in life.  The problem is time is rarely within ones control.  And so it was with the Facebook IPO.  As people complain bitterly about the US economy in an election year, it has become increasingly difficult and complex for the average American worker to understand why Greece matters so much.  But the reality is it does.  It affects all the global financial institutions who hold Greek debt.  It jeopardizes the stability of the Euro.  If  Greece is to be bailed out it means Germany will have to intervene, then the question of who is next, Spain , Italy, Portugal, etc…  In the end though it creates jittery financial markets.  Jittery markets are not local they are global and therefore Europe’s jitters come to American shores. Which is exactly what Facebook entered into, a jittery global market.  I think many thought Facebook would create a “new” dotcom boom.   However the current global crisis has deep roots and deep wounds that will scar the global economy for a long time.  The expectations of the Facebook IPO were too great and never realistic.

The second issue was the NASDAQ’s handling of the IPO.  When I first heard Facebook was going public I thought it would race towards Apple and Google prices of over $500 per share.  However after the first day of trading it was apparent it would not get anywhere close to those levels,  Some said the opening price of $38 per share was too high.  Others, and I count myself in this group, said too many shares were made available.  Even at $30 a share you are still looking at a company valued at $90 billion. You are looking at over 2.74 billion share that were made available.  To put in perspective after all the split and buybacks Microsoft has 8.4 billion outstanding shares, two splits and Facebook will be at that number.  Do not expect  a Microsoft with splits on a yearly basis over a decade for Facebook.  It seems as the NASDAQ caved into the hype and now will pay the price in the form of numerous lawsuits.

There is also the glamorous side of things with CEO Mark Zuckerberg marrying his fiance Pricilla Chen.  Makes for nice press and it may seem charming to marry your love on the same day as your baby goes public making you a mega multi-billionaire.  Then surprisingly disappearing from site for a while.  He is young and he may be smart, but some of his wisdom is lacking when it comes to life’s experiences.  Though I am a bit confused as to why the press thinks his missing status a few days after getting married….try a bedroom?  Just suggesting as the press is oh so smart.  Don’t trust the Wall Street Journal on this one, go with People magazine or dare I say the Enquirer?

With all the negative attention I am not too concerned about Facebook’s future prospects.  Some have asked or questioned Facebook’s mobile strategy as this is the next holy grail.  I think Facebook was one of the first companies to get the need for mobile applications.  Early on in the iPhone craze Facebook was the “killer” app.  Can they monetize mobility?  I think it will be relatively easy for them to do this.  When I use Pandora for music on my iPhone I see a lot of ads that I find relatively non intrusive.  There is also the persistent rumor of a Facebook smartphone.  Could be interesting lets just hope it is not another Microsoft Kin.  In the end though I have always viewed Facebook as a leader in the mobility space and I expect that to continue and I expect them to monetize mobility.

It also seems in the ad business right now that the place companies want to be is Facebook.  This will be a major threat to Google as there will be less perceived value for search ads versus an internet application where people hang out, in large numbers.  Despite Microsoft’s investment in Facebook it is a double edge sword as companies are even less likely to maintain or increase budget to advertise via Bing or MSN.  The attraction for advertisers is people literally hang out on Facebook  For ad execs that is a more understandable revenue model as it in some ways is just like watching television.

Looking down the road given its audience size I see other prospects.  Video content seems the obvious one, but maybe more broadly entertainment in general.  I have long felt that we will soon have a day where a movie is released straight to the internet by passing theaters (I find this sad, but the writing is on the wall).  Facebook with 900 million subscribers would be a very attractive channel.  Music Entertainment could be the same.  A key for all this will be hooking up to my flat screen, though I love my laptop the entire family cannot gather around it.   In this regard it will be interesting to see what Facebook defines as its channel strategy.

In the end despite the negative publicity around the Facebook IPO I am optimistic about its future prospects.  Things will turn in Facebook’s favor, unless at the executive management level there is a complete meltdown.  All eyes will be turned to when Facebook announces its Q1 earnings and I think they will be good and start the path to having a predictable growth model.  We know already that they generate $4 billion in revenue with a net income of $650 million, so it will be interesting to see the cost structure of the company in more detail.  Maybe more impressive is that it is doing this with a little over 3500 employees. We do know that once an internet based company gets rolling the momentum can carry a company forward quite rapidly.   Then we can start getting excited about the next big IPO, Twitter.

Good Night and Good Luck

Hans Henrik Hoffmann May 25, 2012