Facebook IPO: Not up to par

By Nihar Parikh

On May 18, 2012, Facebook Inc. raised $16 billion in the largest public offering by a technology company, but has then seen a 28% drop in its stock price over the course of its first two weeks of trading, also one of the largest drops in recent IPO (initial public offering) history.

The turn of events seems almost ironic considering the hype and buildup surrounding Facebook in the weeks prior to the IPO. Facebook’s dominant share of internet traffic, its 800 million active users, and its wealth of personal information made investors, large and small, confident that investing in the company would pay immediate dividends.

Instead, Facebook’s share price has steadily dropped in the past three weeks. The share price opened at $38 and now sits at close to $28, reducing the overall valuation of the company from more than $133 billion at its peak to less than $82 billion.

Now, economists are blaming Facebook’s inflated valuation on opening day and its flawed business model for its recent woes in the public market. Facebook only brought in $4 billion in sales in 2011. Its valuation at close to $100 billion implies a valuation based on twenty-five times sales. Many analysts feel that number is extremely inflated and should be closer to ten, bringing down the valuation to only $40 billion.

Many analysts also feel that Facebook cannot monetize its market dominance easily, especially on the advertising front. Facebook is currently reliant on display front advertising, when many attribute the success of Google and other Facebook competitors on their focus on personal data, direct marketing, and peer recommendations. This contrast shows that Facebook is still trying to find a strong business model that can make use of its amazing product and its huge following.

But what does the drop in Facebook’s stock price and valuation mean for the health of Silicon Valley? Some feel that Facebook’s flop reinforces the prevalent notion of a “dot come bubble.” The strongest companies in Silicon Valley’s history have been those who have made significant innovations on the hardware side, most notably Apple, IBM, and Hewlett-Packard; in contrast, hundreds of web startups have come and gone, often garnering millions of dollars in investment but then fading into obscurity. Most attribute this to the virtual impossibility of gaining significant traction in the web market.

But Facebook seems to have done just that. Facebook receives a staggering 37.4 trillion page views in a year. So why aren’t investors confident that the company will be successful in the future?

Fortunately, it’s not accurate to say that “so goes Facebook, so goes the dot com industry.” “Dot com bubble” or not, money is flowing from the financial centers in the East to coffers of some of the smartest, most innovative people in the world. Even if this money goes to fund more web “busts,” there is a strong chance it will also fund innovators that could create the next Google.

MSJ alumni Aatash Parikh, currently starting a summer internship at Google, agrees with that concept. “Silicon Valley is what it is not because of the IPOs and acquisitions; what makes Silicon Valley flourish is people who are driven by creating value for the world through innovative technology and products. High stock valuations (or occasionally low ones) are simply a side effect of the innovation, and as long as it stays that way, Silicon Valley will be just fine. Google, Apple, and Facebook are totally changing the world with the products they create, and as long as they keep doing that, people will keep investing. As they should.”