Nancy Miller on the Facebook IPO: Part One

It’s not all that often that a era-defining initial public offering comes along. In the next few weeks Facebook is set to go public amidst a great deal of talk that there is a “bubble” in Silicon Valley. The Facebook story is more than the question of whether you should try to get in on the IPO. It really puts a stamp on the Web 2.0. Veteran journalist Nancy Miller is covering the Facebook story in depth via her e-book The Facebook IPO Primer which also happened to get a positive review from David Merkel at the Aleph Blog.

Admittedly the vast majority of individuals and institutions who put in for shares in the Facebook ($FB) IPO will likely get shut out, but that doesn’t mean there aren’t lessons to be learned along the way. I asked Nancy a series of questions about the Facebook and its coming offering. Here is the first part of our Q&A.

AR: The Facebook deal is the first big game-changing IPO to come down the pike seemingly since Google. Given recent first quarter numbers how does Facebook compare to Google prior to their IPOs?

NM:  The big question people are now wrestling with is how is Facebook different from or similar to hot tech companies like Netscape, MySpace and Google.

What I find so interesting now is that when I first wrote the ebook, a lot of people asked how can you compare Facebook to Netscape and MySpace? They are too different, they said. But that perception changed overnight when Facebook revealed that for the first time ever, total revenues fell sequentially between the fourth quarter of 2011 and the first quarter of 2012. Boom! It was like a blizzard hit on a sunny day in July.

Suddenly everyone was whispering “Myspace.”

So let’s pause a sec and look at MySpace. Myspace, many will recall, was once bigger than Facebook and really made social media popular. When News Corp. bought MySpace back in 2005 for $580 million the press was mostly positive: What a great idea! News and social media, a marriage made in heaven. But within three years, MySpace was hemorrhaging users and Facebook was growing exponentially. There were a couple of reasons for the dramatic shift. One was simple: Facebook was easier to use. MySpace allowed users to customize its pages, which made it hard to navigate. And it was spammy. Also important: News Corp turned out to be a difficult owner – as touchy as public shareholders demanding bigger returns immediately.

Flowtown, which makes cool infographics, published one in 2010 called “Facebook’s Coming of Age,” which was basically a visual comparison of Facebook and MySpace. Until about a week ago, comparing the two seemed laughable.

No one is laughing now. The drop in Facebook’s first quarter earnings, both year-over-year and sequentially was jarring. Everyone knew that Facebook was spending like crazy, expanding its data centers and hiring (including stealing like mad from Google).  But most people were expecting revenues to grow and offset the expenses. They seemed surprised that revenues had slipped from the last quarter to the first. But if you look closely at the numbers, advertising revenue had dropped from the fourth quarter to the  first quarter  in 2010/2011. Robust growth in Facebook Credits – its virtual online currency – masked the drop in the previous years.

So this is where the Google factor enters. A lot of people refer to Facebook as the next Google – which means the next big thing. Both Google and Facebook have changed the way we conduct our everyday lives. Their businesses are so disruptive that we use the names of their businesses as a verb.

Let’s look back at the Google IPO in 2004. You can see revenue growth was just stellar  as was net income. Even if you say, okay, Google was much smaller when it went public and it was younger, too, you won’t get much comfort by looking at the comparable numbers three years later (and the same age as Facebook): earnings were growing, about 35% year over year; at $16.6 billion, revenues were up 50%.

So the first quarter earnings report from Facebook was upsetting because originally everyone was able to scoff at comparisons to Myspace (its product wasn’t as good and it had an inept owner) and to fully maintain that Facebook is Google, metaphorically speaking.

But now it turns out that Facebook is Facebook. Or should I say that Facebook is Mark Zuckerberg.

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For more on the Facebook IPO check out Nancy’s e-book and stay tuned for part two of our discussion.

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