Facebook – will its troubles never end

Unless you live on another planet you’ve heard that Facebook’s stock has seriously crashed since its IPO. Since the purpose of Facebook is to make its founders rich (and you thought it was to provide you a fun free service) the stock price crash is a real problem. But the bad news just keeps on coming, so here’s just a few tidbit:

  1. About 10% of Facebook’s users are bogus (this sounds low to me but this is Facebook itself airing its dirty laundry so undercounting seems likely), but they classify the bogus users narrowly and spin that only 1.5% are actually undesirable (as in really bad spammers). Now not only does Facebook not make any money off the bogus accounts but the bogus accounts often engage in behavior that irritates real users. So how long before the hassles on Facebook outweigh its benefits? Now that is what Facebook admitted in its 10-Q, but this article may indicate it’s worse than they admit.
  2. And some of those “users” on Facebook who just promoting themselves and buy ads are discovering that many of their ad clicks are just bots (which still means they pay for the click) and that Facebook is not being aggressive about ridding the commercial sites and ad buyers from these bogus clicks (why should they, Facebook still gets paid for bot clicks).  Bots are one thing that are costing Facebook commercial accounts but so are the fake likes who evaporate when the commercial outfit tries to exploit them (of course, that’s just ducky to begin with but at least the spammer should get what they pay for). So Facebook puts out a feel-good article that just happens to be from someone who works for them (indirectly) about how, oh yes, you really can make money on Facebook.
  3. If all these weren’t enough Facebook’s problem with mobile is soaring. Now what is this problem? Well, those itsy-bitsy screens just don’t have enough space to flood you with ads and therefore Facebook doesn’t make any money off you. So the only way Facebook can make money off mobile users is to not show you what you want, but what they, Facebook, get paid to show you, and won’t you just love that. Coming soon, lots more ads in your feeds – have fun reading junk before you get to the good stuff.

So, in short, Facebook’s stock has crashed because investors (or at least the investment commentariat) don’t believe it can make enough money to justify stock price. See there is this little issue in stocks known as P/E (simply the Price of the stock divided by the Earning per share). Facebook’s P/E has been around 50, or viewed another way as a stock holder you only get 2% of the price you pay for the stock back in earnings. Now is a P/E of 50 or so good or bad? Well, that depends. The higher the value is the most risky the stock is (risky – meaning will you lose money on the stock). But high values are OK for relatively young companies because they’re growing rapidly (the E is rising fast, so P/E will drop). But is E rising fast for Facebook or not?

The E for Facebook is based on two factors (simplistically): 1) how many users do they have and how fast is this growing, and, 2) how much money do they make per user and is this increasing or decreasing.  So here’s why the troubles I listed above are problems for Facebook:

  1. with mobile they make less $’s per user, so having a larger fraction of their users access, esp. exclusively, from mobile, means less E per user. And if they start cramming more ads down your throat to try to drive up E, you’ll probably hate it and some of you will go elsewhere. So Facebook is caught between: lots of users but not many $s per user or lots of $s per user but not so many users. So they have to figure out where the optimal balance is, and guess what, what you want is not part of their calculation, just what’s best for Facebook’s bottomline.
  2. with all those bots doing the ad clicking or the fake users the advertisers are wasting some or even most of their money, so either: a) they’ll stop advertising at all (or at least cut back), or, b) they won’t pay as high a rate for the ads since the fraction of clicks reaching their target audience is low. So this means Facebook has to get you real users to pay more attention to ads so they can justify the view price given some fraction of views is useless to the advertisers. So the more bots and fake users there are the more you must look at ads or else Facebook’s E drops, which means their P will drop and Zuckerberg will lose more billions, so do your duty, look at the ads, and take one for Mark.
  3. in several of the sources articles I provided is also the notion that user growth is slowing down (or only growing fast in areas of the world where ads have very low prices). Facebook probably is close to market saturation in major and lucrative ad markets, so that means growth is slowing down which puts pressure on P/E. So, again, you want to keep your free service, then shame anyone you know into thinking they’re a total loser unless they join the Facebook cult too, and, don’t you dare think about spending your time anywhere else.

OK, folks, you see what I mean here. Well, probably no. OK, you think Facebook exists for your entertainment and amusement. Buzzzt, WRONG. Facebook exists to make money off you, but selling your eyeballs and profile to others. They are a business and a rapacious one at that. Their stock carries a very high premium because Facebook (i.e. Zuckerberg) hyped their stock as the most wonderful investment anyone could imagine. But their Ponzi scheme isn’t working. The IPO flubbed and made a lot of people mad (see below as to why they’re really mad about the IPO) and now the stock has substantially dropped and soon the lockout period (the time employees can’t sell their stock) will expire and a bunch of stock is going to be dropped on the market. In short this emperor isn’t wearing many clothes. So Zuckerberg is going to have to do something fast or he’ll continue to lose billions a week and never catch the really rich guys and therefore, boo-hoo, since money is just to keep score when you’re rich, he won’t be the next wonderboy Gates and his ego will be crushed.

So users, unite – get clicking on those ads, because that is your destiny on Facebook, click, click, buy, buy. And you thought Facebook existed for your status updates – just fell off the turnip truck, eh.

btw: Why are people so mad at Facebook for their IPO? Well, you see it’s simple. It’s a leftover from the 1990s dotcom boom. Startups deliberately underpriced their IPOs and gave allocations of stock to “friends” (movers and shakers in the investment world) so the freinds could flip the stock on the first day (to you rubes in the heartland) and make a quick buck for themselves. Since this little bribe was in place, those movers and shakers told all you rubes how wonderful the stock was and how you just had to get in on it. IOW, the “opinion” leaders were paid for their recommendations and those people got used to that graft.

But why would a company “underprice” its offering? When the company sells stock it’s trying to raise money, so why wouldn’t it get as much money as it can? Of course, the answer is it is paying these bribes and so has to underprice. We all know how Zuckerberg cheats his partners so what he did was, at the last moment, drastically raise the price of the offering, which really means he suckered all the “smart money” and turned them into rubes. Now note that some of the stock that was being sold in the offering was not by the company but by the other “investors”, IOW, Zuckerberg himself. In fact, just before the offering the amount of insider stock being sold was increased. In short, Zuckerberg fleeced all those “professionals” in the investment community. Now many of those people get to write in blogs, in investment advice, in newspaper columns, and their long-knives are out because Zuckerberg stole their graft and welched on the deal. So now they’re “punishing” Mark with the huge drop after the IPO and now telling him the hoops he has to jump through before they’ll friend him again and hype the stock.

And you thought social media was just a playground for you and your friends. I suppose you think that drug dealer is your friend too. Grow up, you’re swimming with the sharks!


About dmill96

old fat (but now getting trim and fit) guy, who used to create software in Silicon Valley (almost before it was called that), who used to go backpacking and bicycling and cross-country skiing and now geodashes, drives AWD in Wyoming, takes pictures, and writes long blog posts and does xizquvjyk.
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2 Responses to Facebook – will its troubles never end

  1. dmill96 says:

    Facebook’s troubles continue, stock dropped below $20. The end of lockup is really spooking the market, plus bad Q2 and no advice for the future. Hey, Mark, you can’t con all of the people all of the time. http://www.huffingtonpost.com/2012/08/02/facebook-stock-fb-shares-price_n_1734387.html

  2. dmill96 says:

    A good analysis of how Facebook stock could be cut in half again: http://dealbook.nytimes.com/2012/08/17/finding-the-facebook-magic/

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