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Posts Tagged ‘LinedIn’

Last week Wellington hosted the beer appreciators shindig of choice – Beervana.

No glorified booze-up this, Beervana is the country’s largest craft beer festival and features over 250 craft beers. With brews including the likes of Day of the Dead, Coffee and Fig Ale, and Hop Zombie, it’s clear evidence that we’ve moved on from the bland brewing duopoly that I grew up with.

Sadly, come the next morning I found it delivered the same sort of hangover. Also currently suffering a hangover are the thousands of people who bought into the Facebook IPO. Right now, for every dollar investors put into the social network three months ago they have about 56 cents.

In July the tale of value destruction got worse, when Facebook revealed in its quarterly filing with the US Securities and Exchange Commission that around 83 million of its user accounts may be fake and another 45 million may be duplicates.

Nominally Facebook has around 950 million members, so the news that over 10 per cent of that customer base may be imagined rather than real is likely to get the market’s full attention. Sure enough Facebook’s already ailing share price plunged faster than a neckline at a cougar bar, bottoming out at $19.88 before recovering to around the $21 mark.

The most anticipated IPO of the last few years, Facebook had a strike price of $38 but within two weeks it was south of $30 and continued an unsettling slide ever since.

The good news is that Facebook is keeping good company. There’s been a gaggle of American internet IPOs over the last two years and most of them have been diabolical performers.

The worst I have seen is group buying website Groupon which is now down more than 60 per cent on its listing price. Not far behind is game-provider Zynga and online radio company Pandora which are both more than 40 per cent down on listing price. Meanwhile review website Yelp’s shareprice has lost 20 per cent of its value. Taken as a whole you could be forgiven for thinking the clock had turned back to the dotcom crash of 1998.

There has been one standout web entrant to the listed market world however, and that is LinkedIn. Often incorrectly described as “Facebook for grown-ups”, LinkedIn is part recruitment service and part business development tool.

Unlike Facebook it uses a “gated-access” model. This means contact with a business professional requires either an existing relationship, or the intervention of a contact to make the connection. Significantly LinkedIn has signed up to EU’s International Safe Harbour Privacy Principles, privacy not normally being seen as Facebook’s strong suit.

And whereas Facebook is finding it challenging meeting financial targets, LinkedIn just reported stellar second quarter results. Revenue was up 89 per cent compared with the same period a year ago and earnings were $50.4 million, compared with $26.3 million for the second quarter of 2011. Unlike Facebook’s dependency on advertising, LinkedIn has three revenue streams – its employment business, its marketing business and a premium subscription business – providing useful income diversification.

Even at its current $20 level significant doubt remains at what is reasonable value for Facebook. The kicker is price to earnings ratio (PE). At $20 Facebook is trading at about 30 times the company’s estimated earnings for next year. By comparison Apple, Google and the newly renovated eBay are trading around 15 times next year’s predicted earnings.

But there could be more bad news for Facebook, this time from within – specifically, from the 1.7 billion shares owned by staff and insiders which have been “locked up” by a post IPO trading blackout. From August to November those blackouts will lift, meaning for the first time they will be able to sell. These are staff who until now have had paper wealth in an illiquid company, so there is likely to be good appetite to convert paper wealth into the real stuff.

The problem is simple supply and demand economics. As these shares get unshackled supply is about to go through the roof, this at a time when demand is at an all time low, as measured by share price.

The kicker here is the extent of that supply. Back in May Facebook listed with 421 million shares being made available to investors through the IPO. Over the next three months four times that number of shares will be available for trading.

Looking at it that way the problem isn’t so much a hangover for existing Facebook investors. It’s more about overhang. Specifically the huge overhang that a four-fold increase in supply will bring. Perhaps next year at Beervana we might see a Facebook Fizz – an expensive little drop with sweet frothy head, but with little underneath.

Mike “MOD” O’Donnell is a professional director, author and eCommerce manager. His favourite tipple is the Garage Project’s Pernicious Weed.

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