‘Facebook is Down’ Now Has New Meaning

With Facebook’s hotly anticipated IPO over, let’s slow down to digest everything.

Stocial monitored sentiment for Facebook during its debut IPO day; while most blog posts revealed a cautious outlook on FB’s performance, Stocial interestingly revealed that market sentiment for Facebook was 87% bullish on IPO day.

The rate of change in sentiment is pretty high: the last 24 hours have been very bearish. But even though there are a lot of shorts coming in, some investors are seeing this as an opportunity to buy.

FB opened its first day of trading at $42.05 but fell quickly down to $38 again, ending the day at $38.23. Though this may initially indicate that the bankers priced FB “just right” at $38 per share, we have to remember that on IPO day, intrinsic valuation is not what matters.

On average, Internet IPOs trade up 34% on the first day according to ABR Investment Strategy. Did Facebook lack the sizzle to be average?

Even more concerning is that Facebook’s share price flirted with the 38-dollar-mark several times, but never fell below it. Each time the stock hit $38, millions of bids appeared on Level II quotes. Not a coincidence, simply indicative of underwriters desperately trying to keep the stock afloat.

On Monday the stock dropped under its IPO price to close at $34.03, and continues to slide on Tuesday, down 6% today as of this writing. It seems that while most people on institutional desks are buying as much as they can, retail investors are carefully circling around like vultures, waiting for the moment the stock drops to more earthly valuations.

Facebook’s IPO work had another curve ball with the GM debacle. The conservative behaviour of FB on its first day may have been the result of General Motors announcing a withdrawalof their $10 million account with FB because the ads “don’t work.” However, other analysts revealed that we can’t expect to see the same results from social media advertisements as from traditional advertising due to differences in the nature of how users consumer social media content.

The performance of a tech company on the public stock market comes not from the number of users it has, but from how effective the company can monetize its users and its future revenue-generating potential. Facebook has long held an aura for investors who believe the product is revolutionary enough to justify a 100x P/E multiple, but detractors argue that Facebook is simply “just another tech company” with modest conversion rates and an ARPU of only $5.11 in 2011.

Facebook’s current stock price gives it a valuation of $104 billion: with 901 million global monthly active users, that translates to an average value of $115.43 per user. But simple averages can be misleading—if we assume that the proportion of users on the site are distributed according to a Pareto distribution, then 80% of the users on the site account for only 20% of the site’s valuation. This quick-and-dirty calculation means that the top 20% of the “power users” on the site have an implied valuation of $461.71 per profile, while the remaining 80% of users are only worth $28.86 each to advertisers.

The differences in user valuations reveals Facebook’s “secret sauce”: if advertisers can find a way to leverage the network of these “power users”—you know, the ones who have thousands of friends, post every three hours, and are trendsetters among their friends—then Facebook’s valuation may be justified for the time being.

But beyond that, if Facebook decides to pursue revenues solely from targeted behavioural advertising, then it’s going to have difficulty justifying its high valuation in the long-term.