Facebook’s stock slid after its initial public offering of $38 on May 18, closing at $32 on Wednesday. But the stock’s out-of-the-gate slide—and the onset of legal challenges that have hit the IPO process—are more of a reflection of Wall Street’s fixation on short-term gains and less a judgment on the long-term value of Facebook’s massive store of user-created unstructured data, according to veteran observers of technology IPOs.
Wall Street is looking at Facebook’s 901 million user pages as a platform for online advertising, not the endless supply of social and behavioral data those millions of people post, said John Shinal, technology columnist for Dow Jones MarketWatch.
“Most of the equity analysis is based on how they monetize their user base [now],” Shinal said. “I’m not sure anybody on Wall Street is considering the value of [Facebook’s] data. They’re really sort of stuck in the old online advertising model.”
In an addendum to the prospectus issued before its IPO, Facebook itself highlighted the advertising issue. The company warned investors that while more users engaged in the social network via mobile devices, the company does not “generate any meaningful revenue from users accessing Facebook through our mobile products,” adding the company believes it has opportunities to do so in the future.
Shinal said Wall Street is historically slow to adopt new ways of valuing companies.
“Wall Street is always behind Silicon Valley when it comes to figuring out these business models,” Shinal said. “In some cases, that’s a good thing, because a lot of these business models are not sustainable.”
Avoiding the ‘Creepy Factor’
Even when considering the unstructured data Facebook collects every day, the company still faces challenges in creating value from it.
What Facebook needs to figure out, according to Chuck Hollis, the Global Marketing CTO at storage vendor EMC, is a way to use the data it collects for profit but still reduce “the creepy factor.” Hollis, who also blogs about the technology industry, said Facebook’s ongoing privacy concerns will mean the company can’t rely on selling the data it collects on user activity to marketers alone.
“What happens to their business model when everybody realizes, ‘Hey my data is being used and marketed?’” Hollis said. “They’ve got this interesting line to walk of having this enormous amount of access to information to monetize, and not creeping people out. I would think that, at some point that they have to be clever enough to monetize the data they have that doesn’t erode the trust they have with their users.”
Hollis said Wall Street investors looking to make short term money may not understand what business executives are just figuring out: data is a profitable commodity if it’s mined correctly.
“Business leaders are starting to wake up and realize this is the new digital wealth,” Hollis said. “This is like the oil wealth of the early 1900s. When will investors value companies by the data streams they sit in, and how they can monetize them?”
Hollis pointed to CoreLogic, a real estate and mortgage data analysis and business intelligence firm that was spun off of The First American Corporation in 2010. First American’s title insurance and real estate settlement business was creating an enormous amount of data on property, real estate sales, mortgages, consumer credit and tenant history, and Hollis said the company’s board saw that valuable revenue stream could and should be its own company.
On May 23, shares of CoreLogic traded at around $17, higher than First American Financial Corp. shares at $15.46.
Amazon.com’s IPO Was a ‘Sideshow’
Another tech giant had a similar up–and-down start to its public life; when Amazon.com went public in 1997, some Wall Street analysts predicted the online bookseller would go bankrupt.
But founder and CEO Jeff Bezos said from the beginning the company was more than just book retailer, and Wall Street didn’t understand his non-traditional business model.
James Marcus, who was employee No. 55 at Amazon.com and worked as a literary critic, said Bezos told his employees to simply ignore the IPO, because it was just “a sideshow: an important sideshow, but that’s all it is.”
“It was clear from square one that Jeff Bezos actually had much bigger ambitions for the company than just selling books,” said Marcus, who wrote a book about Amazon.com that was published in 2004. “When the company went public a lot of the skeptical blowback had to do with the fact that none of these valuations could make sense for company that just sold books. I have to give Jeff credit for saying to his employees, ‘Ignore the market. Ignore Wall Street and what people are saying.’”
Marcus said one thing Wall Street didn’t understand was the “extraordinary amount of data that they were collecting about customer behavior.” It had never been done before; it had never been possible before, he said.
Amazon.com raised $594 million in its public stock offering in 1997 and rose more than 2,700 percent in three years, as The New York Times noted in comparing Facebook’s IPO to recent technology public offerings.
A Very Different World
Shinal said that the today’s Wall Street is a much different world than when Amazon.com went public. Over the last decade, private capital has emerged as a huge force in fostering new technology companies.
“It’s really a new thing, and it meant that Facebook and Zynga and GroupOn were able to raise more money by an order of magnitude than any previous startups before they ever came to the public markets,” Shinal said. “This is not your typical IPO form 10 years ago, because they had already raised so much money,” he said, adding that Facebook was already “at the size and the profile of a public company.”
Facebook’s future will depend more on its ability to mine its user data to create marketable insights. And while Facebook faces questions on the IPO process it and its investment bankers followed, the IPO itself raised $16 billion in capital to invest.
“The purpose of an IPO is to raise money for a company so they have a war chest, and in that strict sense, this was a huge success,” Shinal said. “They sold above the market. It may be a black eye down the road … but the as the primary purpose which is to raise money, this was widely successful.”
Email Staff Writer Ian B. Murphy at email@example.com.