Why Facebook is Headed Much Lower
Facebook shares took another hellacious dive last week when the lock-up period for insider selling ended on Thursday. Gluttonously coveted by investors in the months leading up to the IPO, the stock has become a pariah after falling 50% from its $38 offering price in May. Was it jinxed from the start, as some have suggested? It is indeed true that technical gremlins on Nasdaq plagued the order book the day Facebook went public. And although some sore losers have sued to get their money back (if not their hands, belatedly, on fire-sale shares) the exchange glitches seemed to us like business as usual. Facebook’s real problem is that it is just another Internet fad that will probably never earn a profit commensurate with the $100 billion valuation it was given by IPO buyers.
Looking on the bright side, the hugely hyped public offering served the Darwinian purpose of shifting vast sums of capital from exuberant imbeciles to clever mountebanks presumably able to put it to more constructive economic use. However, the amounts at their disposal are apt to keep shrinking as more and more speculators abandon the stock. Readers may recall a prediction made here a few weeks ago that FB would fall to at least $13.97 before finding traction. That would represent a further decline of 27%, based on Friday’s $19.04 close. Even then, we would expect still lower prices to follow once the stock has taken the obligatory dead-cat bounce. But if our initial forecast pans out, FB shares will have lost nearly two-thirds of their value since the company went public.
Would-be advertisers were skeptical from the start that Facebook would deliver great returns for their marketing dollar. Even so, they are apparently having trouble wrapping their pseudo-scientific minds around the counterintuitive notion that a Web-based company with nearly a billion subscribers can’t find a way to monetize all those eyeballs. For its part, Facebook hired away Microsoft marketing hotshot Carolyn Everson to convince Wal-Mart, Coca-Cola, Unilever et al. that Facebook buzz can actually boost their sales. Now, most of us understand that five-hundred-thousand “Likes” for Coca-Cola on Facebook are not necessarily going to sell even one additional can of soda pop. But ad-men do not think that way. They truly believe in their hearts that it will always be possible to increase sales with the right pitch. Thus, to a company struggling to sell term insurance in the aftermath of thermonuclear war, an ad-man might say, “Don’t sweat it! Instead of focusing on the war and the resulting destruction of civilization, tell your customers about the benefits. Tell them about the security that a good term policy will bring to survivors.”
This can-do spirit may have found its apotheosis in Ms. Everson. “I love being challenged,” she told a Wall Street Journal reporter. “When people doubt us, that’s when we’re at our best.” Undoubtedly. To make good on her vow, she has dispatched teams of Facebook researchers to talk with ad-men around the country to determine the best way to prove to them that Facebook is an effective advertising medium. You’d think that her boss, Mark Zuckerberg, would have given the matter a great deal of thought by now, but you’d be wrong. At a recent meeting with some advertising heavies, they all wanted his assurance that they’d get a good return on their investment if they committed to spending big money with Facebook. Zuckerberg’ s reported response: “That’s a great question, and we should probably have an answer to that, shouldn’t we?” Well, we can provide the answer ourselves: Although Facebook is undoubtedly an excellent medium for putting targeted ads in individual customers’ faces, doing so will increasingly annoy those customers, driving them toward whatever next big fad awaits in the social networking arena. This was the clear implication of reported discussions between Facebook and big would-be customers. They pressed for more data about exactly whom they were reaching, and Facebook obliged by giving up the kind of information that users are going to feel increasingly uncomfortable divulging. (“Facial biometrics for 500 million users? No problem-o. Coming right up!“) Trying to safeguard users’ privacy while telling advertisers all they want to know cannot be done. And that is why we see the stock going much lower after it bounces, perhaps sharply, from $13.97.