LMU Magazine - The Magazine of Loyola Marymount University

Facebook’s IPO: A Bubble Bursting?

Published: June 13, 2012
By LMU Magazine Staff

After Facebook went public, we spoke to Andrew Rohm, a professor who teaches social media marketing and brand strategy in the College of Business Administration, about one of the most anticipated IPOs ever.

Why did Facebook’s IPO go badly? Was it due to the impact of insider trading, as widely surmised, or did people accurately assess that the immediate or long-term value was inflated?
Whether Facebook had a disappointing IPO depends on how you look at it. On one hand, you could argue that the stock was priced accurately since it ran up to the lower $40s, then closed just around its initial offering price of $38 per share. In other words, at its closing price on the first day of trading, Facebook and its bankers did not leave any “money on the table.” On the other hand, it might have signaled investor concerns over Facebook’s ability to generate enough advertising revenue to justify its almost $100 billion valuation. Remember, just before the IPO the country’s third largest advertiser, General Motors, dropped its paid-for Facebook ad budget. A recent New York Times article on the IPO stated that investors valued each Facebook user at $110, yet each user currently only generates about $4 in revenues for the brand. Although the stock is now selling below $27, with all of this in mind, it’s far too early to evaluate the longer-term prospects for the company and its stock as an investment.

Is this necessarily a bad thing? If this example forces companies to model their future around product and not future value, wouldn’t that be a good thing?
With its current revenues at $3 to $4 billion, Facebook’s valuation is all about its future prospects as a highly targeted, online advertising platform for 800+ million consumers/users around the world. Since Facebook generates its revenues from its global user base, and not from a tangible product or set of products, and because the company is in a constant state of evolution in terms of the services it brings to consumers and its advertisers, its future potential is what is driving interest in the company.

Is the story of the Facebook offering the subject of so much attention mainly because people like to see the mighty fall?
The story behind the Facebook IPO is so interesting because of the speed with which the company and its 800+ million user base has grown since 2004, yet also because of the investor frenzy that went along with the news of its initial public stock offering. Too often, investors (institutional or individual) view Internet and tech IPOs such as Facebook, Google and others as get-rich-quick vehicles. And, research shows that of the past 2,400 technology, Internet and telecom IPOs, the average one-day closing price of the IPO was 32 percent above the offering price. So, there is a precedent for over-sized investor expectations. I think the stock price is reflective of logic and reality taking over from the emotional frenzy that accompanied Facebook's initial offering.

If we compare the Facebook sale with the Google sale in August 2004, is the lesson to be learned that drawing eyeballs to social media is a lot less valuable than drawing eyeballs to search engines?
Comparing Google to Facebook, Google has long served as the beacon for online advertising related to searches. Companies are prepared to pay for online ads on search engines such as Google because search is often related to consumers buying something. Google also generates revenues from its Android operating system. However, it’s too early to say whether Google’s revenues from search in the long run will trump Facebook’s ability to monetize its huge global user base. Just as Google is known as search today, Facebook in the future may evolve as the portal of choice for relevant content, highly targeted promotions and e-commerce, or other applications that I can’t even comprehend at this point.