On May 18, I wrote: “How can a company with SALES of $3.7 billion in 2011 and projected annual sales of less than $20 billion as of 2016 be valued higher than Disney? Higher than McDonald’s? Higher than UPS? Higher than American Express?”
Thus, it comes as no surprise that after announcing the 1st quarter of financial results since its IPO that Facebook’s stock price fell to $23.70 as of the market close on July 28 — off a whopping 37.6 percent from the $38 dollar offering price. So, the question remains: What’s ahead for social media as a BUSINESS?
Many online firms that sell stuff — such as Amazon (even with its low earnings report) and eBay (which has strongly bounced back) — have well-conceived business models based on substantial revenues. The key for them is efficiency and cost controls.
But social media are a whole different ball game. Yes, Facebook and other social media sites are phenomenally popular. Who can argue that nearly a billion followers is not a huge number? Nonetheless, popularity and revenue are not the same thing. Even the most optimistic forecasts about Facebook’s revenues are quite low — and do not justify even a $23.70 price (in my view). And consider this quote from the Los Angeles Times: “Facebook will free up nearly 1.7 billion shares — four times the number now trading — starting next month as provisions that barred employees from selling their holdings begin to expire.” Where will that drive the share price?”
And let’s keep in mind that many legal battles lie ahead for social media regarding the privacy aspects of their drive to generate advertising revenues.
Photo by David Paul Morris/Bloomberg News