The whole world is laughing at Facebook’s IPO. Even the German tabloid newspaper “Bild-Zeitung” is talking about a bubble bursting. Thilo Weichert, a data protection expert from Schleswig-Holstein, is sitting pretty, now that his critical prophecies have come true much earlier than even he considered possible. He considers the shares of the Californian company to be overvalued and is also anticipating a collapse of the Facebook business model due to conflicts with data protection laws in Germany and Europe.
Business strategies for social TV and F-commerce
Karl-Heinz Land from Microstrategy is less pessimistic. At the time of the IPO he told the Wall Street Journal in New York that he did not think the share price would go through the roof straight away. After his return to Germany, ‘NeueNachricht’ spoke to Land about his assessment of the development of the Facebook share price:
“I am a committed long-term investor and don’t assume that share prices will double within three days. I explained to the Wall Street Journal that I’d be happy if Facebook can just about hold its value. There was massive hype before the IPO. The valuation of $100 billion is an amazing achievement. So far Facebook has fared well, despite all prophecies of doom. They have taken in a lot of cash – around $16 billion – and can now invest that in new business models. In my view I would say that the company is actually undervalued. And I’m not the only one. Scott Galloway from the New York Stern University arrives at a similar view. Today, he says, all the emphasis is on the business model relating to marketing and advertising. That generates annual sales of around $4 billion for Facebook. If that figure is used as the basis of a stock market valuation, I don’t get a value of $100 billion,” says Land.
However, he continues, Facebook has completely different markets in its sights, for example F-commerce or social commerce. Where this is headed will be the topic of Microstrategy's iCommerce Summit in Amsterdam in July.
Some analysts believe that in five to six years Facebook will be turning over more than $50 billion as a trader through commerce. The market for advertising will also continue to grow. He estimates that this will benefit Facebook to the tune of $10 to $15 billion in the coming years.
“Also, Zuckerberg’s company is moving into the areas of TV and social TV in order to tap into those advertising markets, which generate a total of $200 billion a year. Even if Facebook only secures 10 to 20 percent of this market, it will be adding further sales of around $20 to $40 billion. Then its annual sales in future will be in the region of $90 to $100 billion. This is the precise reason for the high valuation of Facebook,” explains marketing expert Land.
Why speculators have egg on their face
Critics such as data protection expert Weichert, already at loggerheads with the world’s largest social network, are viewing the IPO with ridicule and malevolent glee. Shortly before the collapse of the new economy twelve years ago, the ‘Bild-Zeitung’ newspaper recommended buying shares.
“If they issue a recommendation to buy, you should do the opposite. Now the tabloid is saying the contrary and is already evaluating the IPO as a flop. Of course, that’s nonsense. The exact opposite is the case. Facebook filled its coffers, which is good for the shareholders. Now the company can sustainably develop its business strategy. Mark Zuckerberg said from the beginning that he wanted to float the company in order to guarantee its ongoing development as a social network. That is why the law suits filed by shareholders due to the fall in the share price in recent days are not appropriate. Zuckerberg himself warned against the hype and made clear reference to the long-term direction of his company just days before the flotation. The short-term speculators now have egg on their face. Those who bought shares for $40 have had a rude awakening. Facebook is no a speculative bet to make a quick buck. The drop in price is a good option to buy shares with a long-term view,” says Land.
A similar thing happened when Google was floated. There, too, the analysts advised against a purchase and warned against the ‘Google gaga effect’. Since then the value of Google shares has increased fivefold. However, that did not happen overnight and it took time.
Brand companies are looking to Facebook’s ecosystem
In the view of Scott Galloway, Facebook could become one of the most valuable brands in the world. He bases this on the amount of time that users today spend on Facebook. Of the total time budget for social networks, 90 percent is spent on Facebook. The other networks share the remaining 10 percent.
“Two weeks ago Facebook launched its own App Center. Companies such as Coca Cola, Mercedes, Nike and Adidas and all the world’s other big brands are starting to develop apps for the Facebook ecosystem. There are companies like Metro who dabbled in the Internet ten or 15 years ago and then stopped. Today many companies see that as a mistake because consumers are increasingly turning away from conventional retailers. This bread-and-butter business is falling away. Organizations are making similar mistakes with social networks. Those that don’t have a presence on Facebook are facing turbulent times,” says Land.
He says that a loyal Facebook customer generates a much higher volume of sales for a company than normal customers do. In some cases the sales generated by Facebook fans is double. Further, he continues, the paradigm on the Web is changing.
“It used to be all about the search. With Facebook the paradigm is changing to the personalization of services. I know what you like, I know your preferences and can serve you as a customer like they used to in the old grocery stores. Facebook is developing into a huge database of preferences and enables services to be provided as if by a concierge in the hotel,” Land summarizes.
His outlook is that the Facebook share price will stabilize at $25 to $30. At this level an investment with a long-term perspective would be lucrative, he believes.
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