Facebook’s IPO and the aftermath

Did you buy Facebook shares in May? Last month saw the long awaited Facebook IPO (Initial Public Offering) on Nasdaq, which was launched with much fanfare and anticipation that also made founder Mark Zuckerberg a multi-billionaire. However, the outcome was not so expected, with a fall in the share price on the first day which has since continued. The fallout from this has generated much comment and finger-pointing, leaving Facebook and their advisors looking embarrassed. So what went wrong?

Facebook launched with a share price of $38, but despite a short initial gain, this price has since dropped to a current price of below $30, which is nearly a 25% reduction in value within the first few weeks. For investors, this is not a good start, particularly compared to Google’s launch in 2004 and the more recent IPO for LinkedIn. Although they should be looking at long term value, it appears that the share price was overvalued based on the business model and current revenue levels.

The main issue revolves around their advertising revenue and future business strategy to increase this. With access to a massive user base around the world, Facebook has an attractive, captive market for many advertisers. However, there are questions about the model. Just prior to the IPO, General Motors decided to pull its $10 million ad campaign from Facebook because they were getting a poor return compared to other ads such as on Google. Many have seen the move as a sign that Facebook’s ad offering may not be as robust as the company would like it to be.

Facebook’s advertising offering is essential to grow their revenue, yet the basic model is very different to Google’s highly successful AdWords system. Advertising works differently on Facebook because users are not searching for something, as with Google, but interacting with friends and online content. Therefore ads need to be distracting and engaging, plus they may work better for branding rather than immediate response. For advertisers, who may well be comparing the cost per click and ROI against Google, Facebook’s results will not compare favourably and therefore it’s not going to be the ‘must-have’ network to use.

In addition to this, there are concerns about how the advertising model will work on mobiles and this is one of the key issues from the IPO process, and many investors say that a key report was not made public before the sale. As more and more people access the web, and Facebook, through their phones, the advertising opportunities are reduced since Facebook’s current model does not transfer well to phones. These concerns have impacted the share price and it’s something Facebook needs to address – only this week, they announced plans to launch their own branded mobile phone in response to this.

Market analysts also say that one of Facebook’s big problems is that its advertising technology, although powerful, is far too complicated for most marketers to figure out. Firms that can’t afford the ad software have been turning to specialized ad agencies to update their ads and run multivariate tests. The Return on Investment (ROI) of these ads is also poor for many companies so that although Facebook can attract large audiences, the question is whether the advertising system is effective and sustainable in the long term.

For the time being, the share price is languishing well below the launch price. Facebook now needs to start performing ahead of expectation, to satisfy investors and to develop systems and strategies that drive new and higher revenues. Being a public company, there will also be more scrutiny and the start of a new challenging period for the leading social network.

If you’d like more information about the Facebook IPO or their advertising options, please contact us for details.

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