Call it American irrational exuberance, call it hype or call it just plain crazy but Facebook has breached the forty dollar mark for the first time since its IPO. This is surprising unless you are a diehard Facebook stock holder and a diehard Facebok fan. This truly is surprising in many different levels. Simply put, this shouldn’t be happening. Many critics with a lot of numbers and a lot of experience behind them pretty much unanimous in their course in Facebook is at best a twenty dollar stock so why is Facebook now over forty dollars and shows no sign of slowing down. Before we analyze the answers, let’s take a look at the very common criticisms of Facebook. They basically fall into two camps, a future growth and based business model.
Business Model Weaknesses
Facebook is a service platform. Mark Zuckerberg is very smart for positioning Facebook as a service platform instead of a website. He knows for well that websites come and go. Websites like Myspace, Geocities and Yahoo have their high point and they go on to fade into history. Zuckerberg doesn’t want to go that route. Instead he has positioned facebook as a service platform. Think of Facebook as a tool that allows you to navigate other websites, interact with the content of other websites and communicate with your friends while you explore and enjoy the content of other sites. According to this paradigm, Facebook is really more of like a centralize communication tool that you log in to but you don’t necessarily have to log in to it to enjoy its capabilities. By replicating its elements of itself through other websites and other partner digital properties, Facebook’s approach is to be everywhere all the time. This is a powerful paradigm but unfortunately it has a massive cost. It costs a lot of resources, software and manpower to make this vision come true. As a result, it is quite understandable why many analysts are cautious about Facebook because the cost per new user is fairly static while the benefit that the user can provide in terms of revenue is still in doubt. For every new user usually from the developing world that Facebook takes on, its costs are fixed so it really can’t scale up. There’s an economy of scale problem as well as revenue generation problem.
One of the biggest criticisms against Facebook during its IPO was that the largest share of its group doesn’t come from its website version. The fastest growing share of people that use Facebook used the mobile version of Facebook. Why is this a problem? It’s because it only has very little ads. It has only been fairly recently that Facebook started showing ads on the mobile version. Many of these analysts are really concerned that not only is the bulk of Facebook going to be shown to people that can’t help Facebook monetize the service but the average click price of mobile based ads is lower than that website based ads. Put together, both concerns have helped sink Facebooks IPO price to as low as seventeen dollars and some change.
So What Happened?
A lot of things have happened since the gloom days of Facebook at seventeen dollars.First of all it’s mobile pictures started to prove. In fact, one of the fastest growing segments of Facebook’s bottom line figures is through its mobile arm. More importantly, Facebook has made dramatic in-roads in terms of replicating its reach across the internet and maximizing the number of advertising opportunities for its presence. This approach is helping boost its income and stock market has been rewarding Facebook for its efforts. As you probably know, the market is also factoring in a lot of buzz and excitement that’s why many critics are saying that the market is overcompensating Facebook for its improvements. Be that as it may, Facebook is on a row. The only question is if it can sustain and continue to increase its income on a sustainable basis in the future and just as importantly can the negative factors outlined above be fully neutralized or dealt within such a way that they no longer pose the substantial risk.