Facebook’s Ambition Collides With Harsh Market!
What Could Go Wrong with Facebook? Everything! (No this isn’t paranoia)
Once hailed as the most valuable technology company to hit Wall Street, Facebook is now worth just over half what it was three months ago, with shares closing at $19.87. The company is suffering from a classic disease — it went public at too high a value. In an earlier post I had argued that FB will find the going very difficult in terms of managing expectations because of the stretch in valuations that it had opted for in the IPO. The challenge for Facebook, is to persuade the market that it is not a fad and that its managers have a blueprint for making money. Analysts have pointed out that Facebook has been slow to figure out ways to make money from mobile devices; half of its users log in on phones and tablets. Given its exceptionally high valuation in its initial offering, FB is under intense pressure to show that its advertising model can deliver the lucre that Wall Street expects.
From a $100bn blockbuster debut to a $42bn valuation in 3 months, Faceboook’s twist of fate, in many ways, reflects the tension between two moneymaking cultures in America: Silicon Valley and Wall Street. They are as symbiotic as they are dismissive of each other. They are equally focused on making money, but their approaches are different. Wall Street wants to see swift growth in revenue, given Facebook’s still high valuation of around $50 billion. Facebook says that it is building tools that will forever change the world — but have yet to reveal any details about how they plan to quickly increase profits.
Quoting Doug Purdy, the director of developer products on FB’s future- One day soon, the Facebook newsfeed on your mobile phone would deliver to you everything you want to know: what news to digest, what movies to watch, where to eat and honeymoon, what kind of crib to buy for your first born. It would all be based on what you and your Facebook friends liked. In effect it moves from the search or pull economics to push economics which is purely analytics based. (In fine lines- Facebook’s future would be built on Google’s grave).
In the technology business, few companies can keep the fairy tale alive forever- Facebook has had a run like no other in the present – but sustaining the momentum and managing expectations is a balancing game that Zuckerberg and Co. need to master fast.