We've been tremendously hard on Facebook here on WSO, from hammering its business model, to thrashing the IPO, to even wondering if its worth using in the first place. Let us not forget one of Facebook's highest profile moves over the past year:
The acquisition of Instagram.
Now, I'm not normally one to pile on, but I think that recently revealed information about Instagram's financial situation only adds to the doubts around Facebook's business model and erodes Zuckerberg's image as a web 2.0 visionary.
- Two Years: Instagram, the mobile filtered-photo social network with over 40 million users, was founded less than two years ago. When Facebook announced its intentions to acquire the fast growing social network in April, Instagram had only 13 employees.
- $2.7 Million: At a hearing in San Francisco to determine whether or not to allow the acquisition to go through, Kevin Systrom, Instagram's CEO, gave a group of regulators an overview of the company's finances. So, what does 40 million users in two years amount to financially? $2.7 million of losses and $50 million of venture capital financing.
- $1 Billion: As we all know, Instagram agreed to terms with Facebook to be acquired for a combination of cash and shares of Facebook stock. To be more precise, the offer was $300 million of cash and 23 million shares of stock. At the time of the deal, it amounted to a total value of about $1 billion. Today, it's closer to $700 million, a steep drop to be sure, but still an absurd value for a mobile social photo network.
Now, granted, one can make the argument that Facebook needed to take out a budding competitor in the mobile space, but how on Earth can the price tag be justified? A billion dollars for a free mobile app with zero revenue? It seems like complete insanity.
And here's the kicker. A regulator asked Systrom how Instagram made money...here's what he had to say:
That's a great question...We do not.
He added that the company had considered various means of generating revenue, but "nothing came of it."
As someone who spent my Analyst days working with entrepreneurs and other hard working businesspeople who've worked for decades to build real businesses and see exits to the tune of tens of millions of dollars, I find this entire thing incredibly disheartening. We're talking about a company that only employed 13 people, generated no revenue, and seemingly had no idea how to. It's almost as though the Instagram team and its VC-backers were banking on winning the lottery in the form of an acquisition, and Facebook gave it to them.
Facebook most likely will try to target ads like Amazn is trying to increase their footprint thru pin interest. For instance, take a photo with Instagram of anything, and Facebook allows you to tag it with the brand and product and then they can package some ad to it so ur friends can see it. Real example. lets say you take a picture of the new $300 Lebrons comming out by nike, u tag it and upload; facebook shows it with ad to nike.com lebron shoe page.
But ya i agree, the price is still steep tho i do see the big picture they are trying to do.
So at what point do individual investors get FB for a bargain? Trades for around half its IPO.. Some very intelligent people, who value companies for a living, spent endless hours coming out with a valuation of around $45/share. How wrong could their assumptions really be in the long term? I'm looking to buy some FB soon and hold for as long as it takes.
These very intelligent people were probably over 40 years old and didn't realize that 1 billion social media users does not necessarily equal profit.
They are very profitable...they are just overvalued. It's an important distinction. All I hear from the media is FB is FALLING! OMG, FB is screwed....the reality is they make $1BN+ in profit and that is growing and got a HUGE amount of cash from the IPO giving up a small % of the company.
Nobody here is screwed - yet. Where they may have some issues is employee retention once the share lock-ups expire and wooing new talent with a depressed share price...especially if they don't offer attractive strike prices on the options.
some very smart people all vying for a piece of a huge IPO that would likely lead to more M&A fees down the road...don't you see there is a major conflict of interest?
How about looking at the financials and projected growth and asking yourself if you think how fast they can get to $3-4 billion in earnings...what I'd say they should earning given the current valuation and growth prospects.
I'd say wait until after Nov. 14 when the major lockups expire and shares flood the market. I think we could see it hit $12/share. I've bet against FB twice already and I still think it's overvalued here...just not as GROSSLY overvalued.
I agree its overvalued.. last summer I did very well buying puts for Netflix, Pandora, LinkedIn, and even Salesforce.. Im 22 years old, and I'm not sure when "soon" is, but I do believe in simplicity sometimes when it comes to investing.. I would buy FB "soon" and tuck it away in an IRA...
I have still, to this point, not wanted anything to do with the stock, not trusting market participants enough to go short.. but I do think it will be a good investment soon if you are not seeking short term gains and not in a rush
Totally agree with this.
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