There's no doubt that the stock exchanges in Asia, America and Europe
have been in a dither for the past few months, and particularly in
the last couple of weeks. Share prices have been expected to
double-dip to new lows by the economic-pessimists, or to rise
exuberantly by the optimists who see economic growth ahead of us.
Both sets of opinionaters are agreed, however, that we are presently
poised in a very dangerous situation. Consumer sales and house prices
in America are still sinking. Eurozone problems are still unresolved.
China is precariously balanced between making a soft or a hard
landing from high inflation. With one or two small exceptions, all
advanced governments are seriously in debt, and China probably also
if the true balance sheets of its largest city governments were known.
In my opinion, the final straw may be the fate of the largest public
flotation ever by an Internet company, Facebook. Now that Facebook
has suddenly brought forward its expected 2013 share offering to May
this year, hysteria has been growing. Indeed, I think it has been
Facebook alone which has caused shares generally to rise in the last
couple of days. Consensually valued at $100 billion, a small tranche
of its shares is expected to realize between $5 billion and $10
billion and its founder, Marc Zuckerberg, with 24% of its shares, is
likely to be able to tuck at least $2 billion into his bank account.
So far, there is every reason to believe that the initial offering
will be wildly successful. Large hedge funds and other big investors
might be making large purchases and the initial price of the shares
might go sky-high. The crucial point, however, is whether they will
be buying the shares because of their long-term income prospects or
whether they intend to sell their shares fairly quickly afterwards
and make a big profit.
If I were a hedge fund investor I would be guided by two facts
already known about Facebook. One is that although it is receiving a
huge and growing advertising income from, it is said, a million
companies, they are mainly banner ads. Few of them are specific
product ads as they are on Google which are there as immediate
byproducts of specific searches for information by individuals.
Furthermore, if any of the billion or more Facebook users want a
specific product then they'll go to specific product websites or to
Google, or Amazon or EBay or their equivalent in their country.
Because of this lack of specificity, Facebook has a very low
ClickThroughRate (CTR) for its ads. Whereas Google has a CTR of 8%,
Facebook's is 0.04%. Moreover, Facebook's previous Online Sales
Manager, Sarah Smith, says that the CTR from even the most
successful banner ads falls within two weeks of their initial appearance.
I would also note that since its saturation coverage of America and
Canada, Facebook lost 7 million users in 2011. How many will it lose
in 2012? I suspect that the reason why Facebook's Initial Public
Offering was brought forward from its expected launch in 2013 was
because it will undoubtedly lose even more users from these two
countries during this year. I would regard this as ominous. Even
though Facebook may still grow in leaps and bounds for a year or two
in the rest of the world (though not in China, where it's prevented),
its users might well follow the American pattern.
For these two reasons, if I were a hedge fund investor I would want
to learn a great many more up-to-date details from the documentation
that Facebook will have to lodge with the regulatory authorities.
And, if these don't fully allay my fears then I'll not apply for
shares in the first place, not only because of the risk I'll be
taking but also because many more potential investors may have come
to the same conclusion and the shares may flop from the start.
In short, despite all the fantastic razzmattaz which is now gearing
up in the media, Facebook's launch may well be a disaster for Marc
Zuckerberg. Indeed, it's possible that the present hysteria will
start declining in the course of this month and possibly even more so
during April when more facts emerge. The Initial Public Offering may
never take place at all.
It might already be happening. The mini-exuberance in share prices of
the last two days has already subsided. Maybe a few thousand key
investment managers and hedge funders have, like me, decided to read
more about Facebook on Wikipedia in the last day or two and their
mood has already fallen back to their previous ground-state of
indecision as to where to invest next. A repeat version of the 2000
dotcom crash is not going to happen until at least the 2008
credit-crunch is finally out of the way. There could still be a
world-wide currency catastrophe due to an as-yet unknown trigger
without Facebook needing to be the catalyst.
Keith
Keith Hudson, Saltford, England http://allisstatus.wordpress.com
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