Facebook, the next bubble?

Last week saw the stock market debut of Facebook, whose initial public offering (IPO) has been surrounded by much hype. Investors purchasing Facebook’s shares will be seeking big returns for what are expected to be fairly long term investments, as is evident with Facebook’s earliest investors such as Accel Partners (who, having invested $12.7m in 2005 are thought to now be holding a stake worth up to $9bn).

After the Groupon IPO of last year, which valued the company at $26 a share, there are doubts however, as to whether these socially reliant technology companies constitute the next bubble. Groupon was valued by the market at $13bn, after predictions that it would reach the $15 – $20bn mark, and investors have in fact now made losses, with a share price closer to $20 today. Whilst Groupon’s instability in this regard can be attributed to a number of factors not associated with Facebook (the massive spending in order to acquire new subscribers for example), there does seem to be considerable hype surrounding a company which faces its own challenges.

There can be no doubt that the traditional approach of valuation based on assets is far outdated for business today, with so much being based not only on the hard to quantify social presence and customer loyalty, but also on the far more intangible internet base. These factors, as illustrated by the rollercoaster ride of Groupon’s IPO, can be seen to lead to reasonable scepticism regarding this creation of a social media bubble, an industry which Facebook can be seen to typify.

Furthermore, the challenges Facebook has to overcome are substantial when you consider the immense market share Facebook already holds in developed countries, leaving the emerging markets as one of the key platforms for growth. This can prove to be serious when one looks at social networking sites such as Renren (China’s Facebook equivalent), which is doing considerably well, with shares jumping 26 percent last week following Facebook’s IPO announcement, as investors see Facebook’s success as leading to the success of rival companies.

Such doubts regarding Facebook’s IPO has not seemed to have affected the attitudes of investment banks seeking the prestige of underwriting such a deal, with Morgan Stanley taking the leading role in the flotation and yet only charging 1 percent of its gross proceeds (deals worth less than $500m usually ask for around 7 percent). This is understandable due to the immense hype surrounding Facebook and so the demand for its shares. Furthermore, the secondary market which has sprung up around Facebook alone, illustrates the potential for its expansion, with the company not only having 3,000 employees itself, but also creating over 450,000 jobs in the US and Europe (including companies used for Facbook app creation and advertising).

Whilst the technology industry is in a state of uncertainty due to a new age of valuation and business (and clear examples of doubt and instability due to this), Facebook’s success is based on far more than talk. Due to the little experience financial institutions and the market have with firms such as Facebook and Groupon, it is likely to run into difficulties, and in that sense can lead us to question whether this is the next economic bubble. However, there is potential for both growth and rivalry, and with the customer loyalty which is both substantial and vital to Facebook, its IPO filed last week can be seen as a key moment in the technology industry.