Facebook’s share collapse has the social network’s strongest critics buzzing, some even going as far as questioning the future of the platform. Are we really betting that this is going to be one of the most valuable companies in the world or is this just business as usual in the technology sector: dot.com crash all over again?
By far the most vehement of criticisms comes from Vanity Fair contributing editor and Newser founder Michael Wolff. In an article on MIT site Technology Review, Wolff melodramatically predicts that the social network “…is not only on course to go bust, but will take the rest of the ad-supported Web with it”. Wow.
Wolff does make a valid point in pointing out that Facebook’s forward price-to-earnings (P/E) ratio is outrageously high compared to that of its successful peers, Google and Apple. Facebook is seeing a P/E valuation of over 50, whereas a company like Google is trading at a ratio of around 12. But to not believe these figures is to not believe that Facebook is truly a phenomenon.
As Facebook’s share price continues to slide, the social network’s critics are baying for blood. In fact most early adopters, notoriously fickle, will tell you that Facebook died a long time ago. In their eyes Facebook looks so 2010. Some will even tell you that the future is now Google+ (strangely, most early adopters have yet to write off Twitter — but its time will come too). Early adopters, who hold great influence over thinking on the web, often forget that the rest of the mainstream world don’t so readily get bored with platforms, sticking to what works for them. The reality is that early adopters start to hate technology when it goes mainstream, as it becomes so… so ordinary.
Facebook is now a massively mainstream platform, with about one seventh of the world’s seven or so-billion people on it. And no-one doubts that it has potential to go even larger given its viral effect. To believe in the massive future revenues of Facebook (and therefore believe that its stock price will rise), you need to believe that the social network is something very different and very special from what we have seen in the world.
And when I look at Facebook’s fundamentals, I laugh at the share price everyone is fretting about (now under US$30). I laugh because I know this not about the next couple of months, or even the next year — it’s about the next ten years. So as the share price goes up, down, sideways and via the backdoor — the smart money continues to hold on. It’s a waiting game and I have all the patience in the world.
In confusing times like these, when there is a cacophony of conflicting reports and opinions, I like to go back to the fundamentals. Fundamentals tend to cut through hyperbole and understatement because they are just that: fundamentals.
So here are the fundamentals of Facebook:
We know GM pulled its advertising from Facebook, but then there are also the countless success stories, such as the claim that for every US$1 that the world-famous ice cream Ben & Jerry’s spends on Facebook it gets back US$3 back. The ice cream maker has around about 3.4-million fans on Facebook.
Columnist Larry Magid in an online newspaper somewhere in the world (isn’t it a funny world when you read a foreign newspaper in a foreign country and don’t care where it comes from or what it is about?), summed it up pretty perfectly: “I don’t know what Facebook is worth today, and I don’t care. Because that type of short-term thinking has nothing to do with what it takes to build a great company… When I look at Facebook, I don’t think about price-to-earnings ratio, but of how it’s changed the world for both better and worse, and how nearly a billion Facebook users are using it to enhance their lives and the lives of those they care about.”
Whether Facebook’s ads are performing to their optimum or not or not getting that click-through or this click-through does not concern me. The fundamentals are there, and the company has plenty of time to tweak, innovate and adapt its model. Buying shares in Facebook is a long-term bet on those solid fundamentals. Capiche?
DISCLOSURE: The author owns shares in Facebook. Hat-tip to the Geeklist for giving me the juice to write this article.