As the stock's value continues to drop -- it closed Tuesday at $31, down 8.9% on the day, and down 19% from the IPO price of $38 -- lead underwriter Morgan Stanley (MS) is being attacked for its 11th-hour cut in estimates of Facebook's revenue forecasts. SEC Chairman Mary Schapiro, has claimed that "we need to look at" issues related to the IPO, and analysts are criticizing everyone from Nasdaq to Facebook itself, desperate to find someone to blame.
In a particularly poignant vignette, one outraged hedge fund manager, a self-described "blue collar Wall Street guy" is livid because his $100 million investment in the company has headed south.
The Problems of Valuation
While there's ample evidence to suggest that Morgan Stanley may have colored outside the lines, the bigger problem is that, as the market is trying to determine the actual value of Facebook, it's becoming increasingly clear that many of the traditional valuation rules don't apply. The company has minimal infrastructure, doesn't produce a tangible product, and is still groping its way toward a solid monetization strategy. When it comes to advertising, a standard valuation question for a media stock, Facebook is disappointing: As the economic bloviators have endlessly pointed out, the site's advertising revenues are unimpressive. And, to make things worse, there's Facebook's claim that the move to portable devices has made it even harder to create a stable revenue stream.
(Of course, it's almost impossible to find a website with a good advertising-based business model, but those kinds of big-picture, systemic flaws aren't really interesting to the jittery buy/sell crowd that is currently complaining about Facebook.)
When it comes to determining the actual worth of Facebook, value investors will have to focus their attention on two somewhat intangible factors: the website's CEO and its place in the social media market.
The Big Boss
Regarding the first, there are the image problems faced by Mark Zuckerberg himself, a somewhat self-conscious 28-year-old college dropout who has been far from impressive in his few public appearances. The Facebook valuation problems don't seem to have hit him too closely, although his worth -- on paper -- has dropped by $3 billion since Friday. In fact, some finance writers are trying to coin the word "Zucked" to describe a paper billionaire who loses a huge chunk of his supposed wealth. Personally, I prefer "Fulded"; then again, my long-term memory stretches all the way back to 2008.
Regarding the second factor, Facebook's place in the social media market, few analysts noted that, even as GM announced plans to stop paying the site for advertising, it was doubling down on its use of Facebook's fan pages. In fact, counting its distributors, dealers, factories, suppliers, and other associates, GM operates hundreds of fan pages, without paying Facebook a penny.
This factor suggests a clear revenue route to revenue for the site. Facebook currently has over 900 million users, and is on track to hit a billion later this year. Millions of companies, institutions, and artists use the site to create fan pages that they use to connect to customers. In fact, fan pages are on track to become a cottage industry of their own, with an ever-growing cadre of marketers offering to build pages, maintain pages, and advise customers on how to use pages. As yet, Facebook hasn't monetized this feature, but it isn't hard to imagine how they could.
How Much Is It Really Worth (Again)
So, to recap, Facebook's paper value dropped from $104 billion to $93 billion in three days.
This didn't happen because of any major moves on the part of the company and wasn't a response to any big market forces. The site's founder and CEO, the guy who built it and has a vision for its growth, is still in the driver's seat -- what's more, with 57% of the company's voting stock under his control, he isn't going anywhere.
As for the future, Facebook still has big plans, and now has a very fat war chest that will make some of them possible. Admittedly, it has a somewhat questionable advertising-based revenue stream, but it is sitting on a potential gold mine. In other words, for the long-term investor, it looks like a great deal. The only question now is how much of a drop should we wait for before buying in?