The Facebook Bubble

Many sceptics suggest that Facebook is overvalued and its IPO is an example of unjustified hype, a bubble which will inevitably burst. I can’t completely disagree with this, but I think it’s a smart move for Facebook to file its IPO now, while it still has significant growth potential.

Facebook has grown very rapidly on the basis of its increasing user numbers, but this can’t go on for ever. Its growth is already slowing in the developed world, and while it’s gaining users in India and Brazil, it’s locked out of China. It will need to demonstrate continued growth in revenues and profits to maintain its value (both at the IPO and in the months following) but it will have to do this by monetising users more effectively, rather than simply signing up more people. It’s not clear how well it will be able to do this.

So does this mean the floatation is the sign of a bubble? The valuation is a pretty good clue – a higher multiple than Google’s at its flotation in 2004 – as are the potential investor motivations for buying shares at the IPO: is it because investors expect further revenue and profit growth? Or because they think they’ll flip the shares to someone else at a higher price? Only time will tell, but there is definitely a bubble-mentality out there.

While we’re on the topic of profiting through shares, so far Facebook has kept its shareholder base quite tight, which means that a relatively small number of people are likely to become very wealthy in the IPO. It wouldn’t surprise me if quite a few reasonably senior people take advantage of the windfall of the IPO and leave Facebook over the next few months or years and we see a generation of new start-ups from ex-Facebook staff – much as we’ve seen from former Google employees over the past few years. This means that the IPO could be a tremendous enabler of innovation – not necessarily within Facebook, but in the wider market, as the wealth gives people greater confidence to strike out on their own.

The final piece of the equation is how the Facebook IPO will affect its users. We’ll definitely see the privacy debates intensify once Facebook become public. Facebook will be under enormous pressure to keep meeting earnings targets, and is likely to become even more aggressive in trying to monetise its users. There will inevitably be a degree of user backlash against some of this, particularly if advertising becomes too well-targeted and consumers realise just how much Facebook really knows about them.

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