Tuesday, January 03, 2012

Facebook Valuation

Facebook is coming up with mega IPO. In today's tepid market, such IPO is definitely going to create buzz. Very few companies have apatite to enter such markets for fear of valuation. Other company which had entered such chaotic markets of 2008 was Visa. Similarities are easy to locate- monopoly businesses which are not much affected by competition and economic conditions. Even in India, one of big IPO expected for the year is of the credit rating agency. Nice to be in such businesses in turbulent times!

But that's not the point I intend to talk about in this blog. I am sceptical about Facebook valuation. I haven't read prospectus of the IPO, so some of my assumptions could be wrong, but I doubt if Facebook really be able to make the amounts of money as the i-bankers claim. This is based on my personal experience in advertising. If I want to spend my advertising budget, I would rather spend on Google rather than Facebook. Let me explain you why, based on my personal experience.

Google advertising helps a business connect with person, when he or she is exactly looking for the services offered by them. When a person Googles something and a Google Adwords ad pops up, people tend to click on such ads. Even though people are aware that they are paid ads, they are at least assured that the site would be related to what they are looking for. So the Clicks are more likely to result in conversions. Money well spent.

On the other hand, Facebook ads appear on the side of your Facebook page, you tend to ignore it. At least I do. I have hardly ever clicked on ads. And even if I click on ad, I may not actually use that service as I am not looking for it. So conversion rate is low. It becomes more of passive advertising creating awareness. Mind you there may be millions of people on Facebook and millions of organisational pages on Facebook, but it doesn't make money as long as people pay for putting ads for this vast database. There was nice article in WSJ enunciating how Ford used Facebook for its car campaign, without actually paying much to Facebook (n in fact ending up paying its competitors Google and Yahoo).

To increase business for our company, I tried advertising through both Google Adwords (Thanks Kaushal for suggesting) and Facebook for our website, dial4cleanhome.com. In Google Adwords I put various keywords related to our business and we get good number of hits with conversion. So we are still continuing with Adwords. Facebook on the other hand was money gone down the drain. I defined target customer set- people based in Mumbai, age group n all (Facebook provides awesome targeting options, really pinpoint targeting is possible). But conversions didn't take place. Of course, it might have created awareness or services offered were not compelling enough to prompt quick sell. But bottom line is I didn't see any returns on my money. So since then, it's only Google Adwords where I put my money.

Of course there could be businesses for which passive advertising is important. But I still feel that advertising on Google is much more sensible option than Facebook. So Facebook may be having this huge database, but I doubt their capability to monetise it. So till they crack that riddle, Facebook would remain bubble!


At 12:42 AM, Blogger Karthik J Iyer said...

agree with you. Google delivers customers who are already looking for something. They are a dynamic audience for ads. Whereas, the audience on facebook is engaged in a personal experience (talking to family and friends, looking for pictures, videos). Facebook like rightly mentioned is into passive advertising, better for engaging with customers.
Facebook needs to convince SEC that it can monetize its 800 million user base not only through advetising but also its ability to leverage apps and gaming platform (Farmville) for revenue. Seems unlikely.

At 9:16 PM, Blogger Jamsaheb said...

Nice read as always... and although i haven't tried anything of that sort, i would go your way...Blind!

At 5:12 AM, Anonymous Swapnil Sankhe said...

You better delete the spam comments else your blog will become the best advertising medium for escorts :)

You are probably right and you are able to relate from your personal experience as well. Half the FB users use it on their mobile and there is no advertising there. Also, P/E ratio of 100 odd at listing is too high and it has to grow at an astronomical pace to justify these valuations.

But I was watching a few documentaries on FB. The reason why we do not have advertising in our news feeds, mobile, etc is because Zuckerberg wants to keep it as user friendly as possible. I admire him for the fact that he did not sell out. For someone in their mid-20s who are offered a few billions to buy their companies, most of us would sell out and enjoy the rest of our lives. But there's a lot of faith investors are putting in the management including COO Sheryl Sandberg and the CFO.

I am astonished to see FB increasing the issue size by 25% and the band being increased to 34-38. It finally priced at 38. All this when the Dow is down in 10 of the last 11 trading sessions. I believe some selling was related to funds reallocating their money in FB but a broad market selloff was mainly due to problems in Europe, Greece and Spain in particular.

When the IPO was announced in early 2012, ECB had injected billions of Euros and were abt to inject billions more for a total of 1 trillion and hence market conditions may have thought to be favorable. But as Greeks and Spaniards are withdrawing deposits from their banks as I speak, I doubt how long the rally in FB will last, if at all there is a rally tomorrow at the open.

I am not eligible to apply to FB IPO but I wouldnt have bought it in the IPO anyways. It has traded as high as 44 in the pre-IPO private markets. So that could be the first level to watch on the upside tomorrow.

At 9:34 AM, Anonymous Anonymous said...

Sankhe.. we not talking valuations here :) we all know u r a city banker

Nice post ninad.. u r finally pursuing ur dream of becoming a blogger !

At 8:50 PM, Blogger Himanshu said...

Sankhe, a batchmate seems not-to-happy with your 'phoren' posting. It's always good to have jealous people around one :) 'samjho tarakki kar rahe ho' [maybe he'll attempt to bash me up now]
And well, about FB vs Google, if FB wasn't making money via advertising, it would have shut down business long time ago. I don't know much about valuations/finance part of it, but the simple fact that FB is growing (in terms of # of users; and hiring people) means they're making money. So I can say with reasonable confidence that it's making money and the advertisers are benefiting.

At 5:08 AM, Anonymous Swapnil said...

Mr./Ms. Anonymous, is it just me or do you see the article titled Facebook "valuation" as well? Dont know if you actually read the article. But these were just my thoughts and it has nothing to do with what I do personally or professionally...

Himanshu, agree that no. of users are increasing but how long will this trend continue? Its still banned in China? Mobile screens are too small for advertising. General Motors publicly withdrew FB advertising just before the IPO. Stock is hammered, its now trading somewhere around 31.
And Anonymous can say whatever he/she wants to man, I am least bothered. Freedom of speech for everyone unlike Iran/Syria/Thailand, etc where you can be jailed for commenting against the regime/royal families.


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