Nottingham Economic Review
Friendster in a hurry. Zuckerberg should be most grateful for, but also most fearful of, the under-30 demographic (figures by Burcher place 90% of Facebook users under the age of 34). What has been true and will always be true is that as quickly as the young are interested, they become bored. This is so regardless of whether it concerns social media, tin soldiers or Pikachu. Unless Facebook can come up with a way to continuously maintain the young’s interest over an extended period, investors should be wary. There are already danger signs of boredom within the Facebook community. One figure suggested that over 6 million US users left Facebook last year which represents about 4% of the country’s 150 million users. Whilst these levels are by no means writing on the wall they do represent a significant threat. Added to this are worries over internet privacy. It is not hard to imagine that with increasing features of smart phones which branch into GPS positioning and mobile banking facilities, not only will consumers demand greater protection directly, but so will regulators. Will Facebook be able to respond to such demands or will this open a niche to a rival? There is also another very important point that is often missed by the mainstream analysis of Facebook: the age of those who will actually buy the shares. Regardless of how many times my father may pick up his iPad or retweet KONY 2012, I rest assured in the claim that no man who wore flares at my age will ever again be part of the core demographic dictating trends in
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‘fashionable’ websites. Yet, those like my father who grew up with rationed food and black and white TV are not wholly uninvolved in this grand event because it is those very same baby boomers who continue to control a large portion of investment funds – the very same funds that might be enticed by Facebook’s IPO. (The average age of Alpha magazine’s top 25-performing hedge fund managers in 2007 was 51, with only “four thirty-somethings”.) With the greatest respect, can this older generation really appreciate the true value of Facebook to the future generation, and can they tap-in closely enough to market tastes to accurately calculate projected earnings? In my opinion, the short answer is no. Of course there are many exceptions to the rule in the form of middle-aged IT consultants and those so-named ‘techies’, but not enough to restore the balance of information. Given this I worry that there is a significant amount of scope for such individuals to over compensate their market valuations, exaggerated by a desire to hop onto the techcompany gravy chain. And it is this matter that all those potential Facebook investors should be concerned most highly with if they wish to avoid the risk for significant revaluations by market forces at a later date. I do not think it is the case with Facebook that we have quite returned to the dot.com bubble days in which companies such as E-Toys had wild, almost magical valuations that were very quickly discovered to be unfounded (perhaps commentaries upon companies such as Groupon and Zynga
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may be best for contemporary comparisons). Instead we have a profitable company with great promise and potential to dominant a large portion of social media. The choice simply is down to risk attitudes of the individual investor and whether they maintain the belief that Facebook represents a paradigm shift in technology companies – representing longevity and long term profitability. There is one piece of golden advice for investment in tech companies, which I’m sure many would echo for the likes of Facebook. If you find yourself holding stock that AOL want to invest heavily in, SELL UP AND GET OUT QUICK.
Fa c e b o o k ’s Valuation - Do We ‘Like’ It?
Photo: Luke Askwith
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By Jason Lee
A
s shocking as it seems, investors believe that the eight-year-old company founded by 27-year-old Mark Zuckerberg is worth more than the likes of Starbucks, Nokia and Dell. So are they right? Are we beginning another bout of ‘irrational exuberance’ or does Facebook actually possess the potential to become one of the world’s most valuable and profitable online companies ever? Facebook boasts impressive figures. The social network could soon reach one billion users with one out of every seven people having an account; if Facebook were a country, it would be the third most populated behind China and India. According
to research firm ComScore, Facebook accounts for 1 in every 7 minutes spent online and 3 in every 4 social networking minutes. Moreover, there are 250 million photos uploaded onto the site every day. These statistics are very appealing but have they earned anything yet? According to the Securities and Exchange Commission (SEC), Facebook had filed a document detailing its finances for the very first time. The document had shown that last year Facebook had made revenues of $3.7 billion
with a net profit of $1 billion. Although these are convincing results, it still does not justify a price tag which is 20 times last year’s revenues and 80 times year’s net profit. Though surely given such a value, investors must believe that the company has at least the potential to reach these figures in the future. In order for Facebook to continue to grow, the internet and technology sectors must also grow. Internet connectivity has grown rapidly throughout the past couple of years,
allowing more people to access Facebook: According to The Boston Consulting Group, there will be around 3 billion people online by the year 2016, up from 1.6 billion in 2010. The increased dependence on mobile phones is another factor to be considered. There are already 425 million people logging onto Facebook through these devices and investors believe that most of Facebook’s growth will eventually come from this area of technology. This could boost the amount of users to a figure beyond that of 1 billion.