The naysayers became a deafening roar from the moment Facebook’s IPO failed to skyrocket in May of this year. It was stunning how quickly the darling of Wall Street became trailer trash. But look no further than yesterday, when the lockup period ended and insiders could sell 850 million shares. Some did but the stock price held and Facebook finished today at $22.17, well above the $17.73 close in September.
Just as suddenly, Facebook is riding a wave of confidence buoyed by stories of its resilience and hidden value. Oh, the market is fickle.
But we bought Facebook at about $18 and feel very comfortable holding on to our modest number of shares. We believe in math over science, especially when that science is the way companies are valued and future price predicted.
The simple math of Facebook is 900 million profiles when the Earth has 2 billion total Internet users. Just under half the planet and growing at a rate faster than Internet adoption. Most new things ride a wave of initial interest and then fade as novelty wears off, but Facebook hasn’t done that. It remains the tool of choice for most people we know to stay connected. It has staying power.
And beyond staying power, Facebook has a simple equation that looks something like (monetization idea) x (900 million users) = (lots of revenue). While the monetization ideas are many and the Facebook’s successes haven’t been consistent especially with ads, it only takes getting it right once before the math kicks in and the money is ridiculous. Just today, TechCrunch ran a story about Facebook Gifts, their convenient e-commerce capability that is a one-stop shop. Facebook claims 100 partners already in the system with names like Starbucks, babyGap and FAO Schwartz.
Even better, Facebook does nothing more than connect people. The partner companies fulfill orders, returns and other customer service. Facebook gets to just make their nearly one billion members available to the retailers. No risk, no incremental operational cost, and partnership revenue. That’s an equation that Facebook can replicate many times over without increases in overhead or complexity.
Math has a funny way of catching up in good and bad ways. Math trumps luck and is the most predictable thing we have…certainly more than science which is constantly on the move. Facebook has math on their side and that’s as valuable as a CEO in a hoodie.
Facebook will do just fine and we’ll be holding onto our piece of the pie.
November 17, 20122 UPDATE: In the Forbes article, Cheers! Now You Can Buy Booze On Facebook, the author further validates the role of Facebook as the back end by letting others be the merchant of record.