Social network Facebook, which will report its first post-IPO quarterly earnings overnight, will never recover the valuation it achieved at IPO, according to Magister Advisors, M&A advisors to the global technology industry.
Victor Basta, Managing Director of Magister Advisors, said: “Facebook’s IPO valuation at $38 a share rewarded potential rather than execution. Only weeks later Facebook must move at lightning speed to broaden its business as core growth is slowing sharply. Otherwise investors will never again press the like button.”
Whilst Facebook may deliver revenue growth of around 25%, the markets are likely to settle on a multiple of earnings more akin to Apple’s, Google’s and Microsoft’s, well short of the lofty multiple it attracted at its debut as a public company.
“If Facebook is viewed as an ‘ordinary’ internet major, its share price could logically drop well below $20 a share,” added Victor. For example, Google generates ten times Facebook’s revenue yet its valuation is only 3 times larger than Facebook’s.
“This differential is unsustainable. Boil it all down and Google and Facebook are the same business. They are delivery vehicles for advertising and they are both chasing the same ad dollar. To use a property analogy, one beachfront property is fully occupied while the one next to it remains vacant, yet the vacant property is for sale at a higher price.”
Facebook’s inflated valuation is not just specific to that company, but is endemic of a current market trend to reward future potential over performance. Victor concluded: “For Facebook, developing a way to make money from mobile, and capture more of the advertising revenue running through its platform, is crucial to restoring value. Otherwise it can never recapture even its IPO price, let alone show a return to shareholders. If anyone doubts the risk of having a too-concentrated business model, they only have to look at Zynga.”
