Facebook must be "more like Google" to avoid the fate of Zynga
27 Jul 2012
Social network Facebook, which will report its first post-IPO quarterly earnings overnight, will never recover the valuation it achieved at IPO, according to Magister Advisors, M&A advisors to the global technology industry.
According to Victor Basta, managing director, Magister Advisors, ''Facebook's IPO valuation at $38 a share rewarded potential rather than execution. Only weeks later Facebook must move at lightning speed to broaden its business as core growth is slowing sharply. Otherwise investors will never again press the like button.''
Whilst Facebook may deliver revenue growth of around 25 per cent, the markets are likely to settle on a multiple of earnings more akin to Apple's, Google's and Microsoft's, well short of the lofty multiple it attracted at its debut as a public company.
''If Facebook is viewed as an 'ordinary' internet major, its share price could logically drop well below $20 a share'' says Basta. For example, Google generates ten times Facebook's revenue yet its valuation is only 3 times larger than Facebook's.
''This differential is unsustainable,'' he says. ''Boil it all down and Google and Facebook are the same business. They are delivery vehicles for advertising and they are both chasing the same ad dollar. To use a property analogy, one beachfront property is fully occupied while the one next to it remains vacant, yet the vacant property is for sale at a higher price.''
Facebook's inflated valuation is not just specific to that company, but is endemic of a current market trend to reward future potential over performance. LinkedIn has a PE ratio of 711, for instance, whilst proven businesses such as Apple and Microsoft have PE ratios of 14.5 and 11 respectively.
Other gravity-defying PE ratios include Electronic Arts at 54 and Rackspace at 73. If Apple, a business with enormous brand value and a world-class track record of execution, received the same valuation as a business like Facebook or LinkedIn, it would be valued at many trillions of dollars.
Says Basta, ''If Facebook traded at Google's PE, it would be worth around $13 billion. Furthermore, Facebook's growth is not more than twice that of Google's which means a multiple that is four times that of Google's is completely irrational.''
He concludes: ''For Facebook, developing a way to make money from mobile, and capture more of the advertising revenue running through its platform, is crucial to restoring value. Otherwise it can never recapture even its IPO price, let alone show a return to shareholders. If anyone doubts the risk of having a too-concentrated business model, they only have to look at Zynga.''
