Facebook’s unfortunate IPO – Wall Street in the middle of it, again.

Three days into trading as a public company it is time to take a look at one of the most anticipated IPO’s the world has ever seen. To summarize it right at the beginning, it was and is a huge mess and it is not very short of an embarrassment for those involved.

Let’s not waste to much time on the technical issues, even though it is fair to say that NASDAQ didn’t convince the world with their performance. However, that doesn’t increase the value of Facebook and its current capabilities. While over the past weeks and before the IPO there was a huge hype about Facebook, besides of the fact that they went public there is really not much to be enthusiastic about. That counts for the short and mid term. What happens in the long term, 2 to 5 years, nobody knows. As it turned out, this wasn’t unknown by the underwriters of the IPO, Morgan Stanley, JP Morgan Chase and Goldman, who had information about downward revenue correction for the rest of the year. That the information wasn’t published during the entire hype has the easy reason that they all wanted to make their money.  This seems not to be a problem with the current regulations, but this is an entire different problem.

Sure the circulating number of 900 million users is enormous, but honestly, I don’t buy into that. In my opinion that is in no way the number of single active users. I just don’t believe it.  I believe that this number includes double and triple profiles and a huge number of inactive users. I would even go so far and claim that at least two thirds of that huge user number is absolutely useless for Facebook’s business model. In other words, the majority of users is not at all interested in advertising on the platform or has no technical ability to see the ads.

I am one of the users who is using Facebook a lot. Going after the description of a power user, I fall into this group. I hear, and know, that Facebook is already placing advertising, I cannot remember a single ad that caught my interest. Not even a disturbing one. The reason for that, I am not on Facebook to watch ads and it would disturb my activities on the platform, which is clearly to communicate. I know from a lot of people in my circles that they feel and experience the same way.

There are much more disturbing facts for the short-term performance of Facebook stock. A huge number of users is logging in from mobile devices. Facebook has currently no means to display advertising on mobile apps. While they probably work on that, there are major issues in making this happen quickly, for various reasons. One of them are the various mobile platforms, systems and players in the mobile space. There might be a chance, due to the close relationship with Microsoft, to get something going quick for Windows phones, but those don’t rule the market, at least not for now.

A business model that is solely based on advertising is a huge risk. This wouldn’t be the first time that such a model would fail. Most of us remember the first Internet bubble. Many websites were hoping to make a fortune on advertising only. Sure, these are different times, more users and all, but people are not more interested in ads than they were then, so do I believe. Facebook’s last quarter reporting supports this thought in parts (and so does the withheld information from the analysts).  So, for the near term, there is nothing bullish about Facebook shares.

Whatever Facebook comes up with in regards to advertising on mobile in the future, in my personal opinion, Facebook is much more a PR platform than it is, and ever will be, an advertising platform. Used in combination with other social media platforms it is absolutely useful to get a message out. Facebook, alone and in combination with other social media sites, is of great value to engage clients, customers and other groups, and in my opinion, Facebook should reconsider its business model and consider a B2B model. At least ad such another option to create revenue and have a second leg to stand on.

The company has stated in the past that they would never charge their users for plain usage. Whatever the motivation for this statement was, I am sure that many business people within the company regret this statement. Well, on whether Facebook can keep its word on this or not has to be seen.  It is entirely possible that down the road at least some of the services will be provided for a fee.

At this point, in my personal opinion, Facebook is far off from being a lucrative stock. Until revenues and profits reach a level that it justifies even the current (falling) stock price it will take some time.

Please read the disclaimer.

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