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Facebook: Over Hyped and Over Priced?

  • Written by Syndicated Publisher 1 Comment1 Comment Comments
    May 19, 2012

    With Facebook slated to start trading, I feel it is appropriate to brush off some of the research and opinion that can help subscribers wade through the sell side waters. To wit, CNBC reports Facebook Faces User Distrust, Advertising Apathy: Poll:

    More than half (57 percent) of Facebook users polled said they never click on ads or other sponsored content when they use the site, according to a new AP-CNBC poll. Another 26 percent said they hardly ever engage in such activity. Only 4 percent of users say they often click on ads — results that are only slightly better than the 2-3 percent clickthrough rate some experts consider the benchmark for effective banner ads.This doesn’t sound too good does it. Well, you can’t say I didn’t warn you last year:.

    Reggie_Middleton_Facebooks_Valuation

    Professional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for this report, available for immediate download – Facebook Valuation Model 08Feb2012.

    It is strongly recommended that said subscribers download and input their own assumptions into said model in order for confident preparation before the IPO launch! I just nominally input some very generous numbers and the best case scenario chart (see the chart tab after your own individual inputs) is quite revealing, indeed! The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update. It is recommended that subscribers (click here to subscribe) also review the original analyses (file iconFB note final 01/11/2011)

    1. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
    2. The World’s First Phenomenally Forensic Facebook Analysis – This Is What You Need Before You Invest, Pt 1

    Facebook users have consistently cast a wary and suspicious eye on the platform: 59 percent of respondents said that they had little to no trust in Facebook to keep their information private.

    That doesn’t sound very good either, does it?

    Yet despite those ongoing concerns, the number of users (and their engagement) continues to increase. Facebook has grown to 901 million monthly active users worldwide, with personal computer users spending six to seven hours per month on the site (compared to just 3 minutes for Google+ users), according to recent data from ComScore.

    Now, this sounds very, very good. Of course, it doesn’t sound as good when you look at it in context…

    Slower subscriber growth…

    As for Mark Zuckerberg, the wunderkind CEO who turned 28 on Monday inspires somewhat tepid confidence as a leader, with only 18 percent of respondents saying they were extremely or very confident in his ability to run a large publicly traded company like Facebook. Yet pinning down a specific reason was difficult for respondents, who neither cited his age, temperament, nor reputation as significantly affecting those abilities.

    Now if one were to ask me why I would be tepid in my confidence in Zuckerberg as a leader, I would say that its not his leadership abilities that are the biggest concern, it is the fact that he can single handedly wreck the company and the weak ass board of directors and the shareholders would be powerless to do anything about it. Instead of referring to him as the leader you can refer to him as the 28 year old potential tyrant and dictator. Reference Facebook CEO Running From Investors ‘Cause He IS The Only Investor Whose Opinion Actually Counts?

    CNBC also included this following chart…

    Hmmm. That doesn’t sound too promising, does it? Well, despite all of this, Facebook is finding absolutely no shortage of suckers asses for which to place in the Facebook IPO seat….

    Hey, it gets worse. WSJ.com and Reuters report GM plans to stop advertising on Facebook:

    General Motors Co will stop advertising on Facebook, a move that comes during the same week the social networking website is due to go public.

    The U.S. automaker confirmed a report by the Wall Street Journal. A source familiar with the automaker’s plans said GM’s marketing executives decided Facebook’s ads had little impact on consumers.

    GM said it will still have Facebook pages marketing its vehicles, but it will drop use of paid ads. Anyone can create a Facebook page at no cost. GM pays no fee to Facebook for its pages, which allow the automaker to reach consumers directly.

    … “In terms of Facebook specifically, while we currently do not plan to continue with advertising, we remain committed to an aggressive content strategy through all of our products and brands, as it continues to be a very effective tool for engaging with our customers,” GM said.

    GM spends about $40 million on its Facebook presence, but only about $10 million of that is paid to Facebook for advertising. The rest covers the creation of content and the agencies involved, The Journal said.

    GM, the country’s third largest advertiser behind Procter & Gamble Co and AT&T Inc, spent $1.11 billion on U.S. ads last year, according to Kantar Media, an ad-tracking firm owned by WPP PLC. About $271 million of GM’s total ad spend last year was for online display and search ads excluding Facebook advertising.

    Hmmm… It appears as if the MSM has it out for Facebook today, in direct contravention of its historical actions pushing this company. I wonder if its because I wrote How Does Facebook Drum Up So Much Frothy Interest For Its Overpriced Shares? Help From The Media, Goldman, et. al.

    I’ve had a few subscribers who, after reviewing the (subscription only) FaceBook IPO & Valuation Note Update and Facebook Valuation Model, have seriously queried how Facebook is managing to drum up so much froth and interest for its obviously overpriced shares? The apparent answer is the marketing machine known as Goldman, et. al. The less recognized answer is assistance from the MSM, as demonstrted by this CNBC article – Facebook’s Premium Ad Prices Still Rising:

    Pricing for Facebook’s premium “social” advertisements continues to rise, two recent studies have found—a positive indicator that could offset concerns about a dip in advertising growth and help sentiment towards the Internet company’s initial public offering.

    This is a net positive statement, no?

    A report to be released on Monday by Marin Software, a digital marketing platform that processes more than $100 million worth of spending on Facebook, found a 26 percent increase over the last year in the cost per click for “premium” ad formats such as Sponsored Stories, which highlight friends’ “likes”, comments and other endorsements of brands’ activity on the site.

    Wow! That’s pretty good growth and pricing elasticity, no? Bring on those newly public shares and let ’em rip!!!

    However, Marin’s report also found the cost per click for Facebook’s standard ads, which make up an estimated three-quarters of the social network’s advertising revenues, fell 26 percent over the last year.

    Wait a minute, if 75% of the companies product dropped in price, doesn’t that easily swamp the 26% of the companies premium ads that rose in price? An even more direct questions is, why isn’t this being reported as the net negative that is is? Let’s walk though this step by step for the more arithmetically challenged amongst us…

     % of revenue Increase/decrease in Average cost Net Change to Gross Revenue
    Facebook Premium Ads 25% 26% 6.500%
    Facebook Regular Ads 75% -26% -19.500%
    -13.000%

    So, according to this MSM article, reporting a net 13% drop in revenue somehow amounts to – and let me quote this so as to be as accurate as possible – “a positive indicator that could offset concerns about a dip in advertising growth and help sentiment towards the Internet company’s initial public offering“. Please excuse me as I wipe the splattered bullshit from my computer screen – it’s hard to type accurately with those opaque, stinking brown stains in the way. Even worse, it goes to show what portions of the MSM actually think in terms of the intellectual capacity of its readership.

    It would seem that Facebook Finally Faces The Fact Of BoomBustBlog Analsysis.

    Professional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for this report, available for immediate download – Facebook Valuation Model 08Feb2012.

    It is strongly recommended that said subscribers download and input their own assumptions into said model in order for confident preparation before the IPO launch! I just nominally input some very generous numbers and the best case scenario chart (see the chart tab after your own individual inputs) is quite revealing, indeed! The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update. It is recommended that subscribers (click here to subscribe) also review the original analyses (file iconFB note final 01/11/2011).

     Here’s where I broke it down on Capital Account

    I also happened to do the same on the Max Kesier show…

    I discussed Facebook on the Peter Schiff radio show, the Facebook excerpt is below…

    Additional Facebook analysis, valuationa and commentary.

    On Max Keiser, go to the 13:55 marker for more on Facebook…

    Here are the free blog posts on the topic:

    1. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
    2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
    3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
    4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
    5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
    6. The World’s First Phenomenally Forensic Facebook Analysis – This Is What You Need Before You Invest, Pt 1
    7. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

    Images: Flickr (licence/attribution)

    About The Author

    Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts to uncover truths, seldom if, ever published in the mainstream media or Wall Street analysts reports. Since the inception of his BoomBustBlog, he has established an outstanding track record

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