They will one day write about Facebook in textbooks. However the entry will not be in the success story chapter but rather in the chapter entitled Cautionary Tales.
The Facebook IPO is the textbook definition of irrational exuberance. Farhad Manjoo writing at Slate states that in order to just maintain its current share price, Facebook will have to increase its revenue tenfold. Tenfold, just to maintain.
The problem for Facebook is that one or two ads by beloved companies like Ben & Jerry’s just isn’t going to cut it. To justify Facebooks’ $100 billion valuation, investors are going to expect amazing growth in its revenues—something on the order of 25 to 30 percent per year, according to analysts. At the moment, Facebook makes nearly $5 in revenue per user per year, and just $1 in profit per user per year. Because it will be difficult for Facebook to attract far more than a billion users—there are only so many Internet-enabled people on earth—its revenues must grow by selling each user for more money to advertisers. As my colleague Will Oremus explained last month, Facebook has to find a way to generate an order of magnitude more money from each of us. If it doesn’t make steady progress on that goal every single quarter, its stock price will fall—and even though Zuckerberg is very well insulated from shareholder revolt, a falling stock price will hurt Facebook’s ability to hire the best engineers, to acquire the best startups, and even to attract more ads.
Every few years investors need to be reminded of the law of gravity. Every once in a while they delude themselves into thinking that the rules have changed. That this company, this sector, this market is different and we will only see up. But gravity is not a suggestion, it’s a law.
Increasing revenue tenfold just to maintain. Never. Gonna. Happen. Facebook is doomed and with it all the irrational exuberance that sustains this economy.
I suspect that within the next 2-3 years (or sooner) we will witness the mother of all corrections in the market and the economy. The only question in my mind is whether or not they will call it the Facebook correction or not?
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