Facebook’s Flop

Harry mentioned the popularity of Facebook. And that got me thinking about the company’s botched IPO this past summer … through the lens of Harry’s S-curve.

You see, before social media startups became the latest craze, company’s figured out how to make money before they went public. That’s no longer the case.

Facebook, Twitter and Instagram are just a few of the social media entities that are more concernrned with growing their customer base than actually making money from the business. (And I use the term “customer base” loosely. Can you call a user a customer if they pay nothing to use your service?)

The popularity of these sites, and the number of free-users they attracted, shot past the 10% threshold of Harry’s S-curve very quickly. Revenue, on the other hand, has not.

These startups knew they’d eventually have to convince investors that some business model would be profitable. They just seem to view that as an afterthought.

Most assumed typical advertising models would work just fine. But Facebook ran into problems when General Motors publically shamed the company by declaring that its Facebook ads didn’t work.

Facebook also discovered that smartphones can sometimes be more of a curse than a blessing. While Facebook users increasingly used mobile devices to update their status, they completely ignored the ads displayed on the small screens.

The chart below details Facebook’s share price since its IPO. As you can see, those who participated in the initial buying frenzy suffered a loss of at least 50% by September. Ouch!

See larger image

Shares have recovered somewhat since dropping to close to $17/share. It’s now back above $25. However, it’s still far from its IPO price of $38.

A clear break above $28 would portend brighter days ahead for Facebook investors. But I’m still not sold on the company’s business model. I prefer to watch this one from the sidelines.

If you haven’t done so already read the Survive & Prosper issue on “Why Humans Are So Successful…



Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.