And Vijay Says…

If you are an investor – directly, or indirectly through a 401(k) or IRA – I am sure you would have followed the fortunes of FB stock . If I had to choose one word to describe it, GREED would be it. If I get one more word, I will choose STUPIDITY.

FB  was set at a high enough price at IPO  that the company was valued overnight in the vicinity of  100 Billion dollars or so of market capitalization.  At that stage – it was all about Greed on both sides. People who had stock to offload had no problems marketing an extremely good story on future earnings, and people who wanted to buy expected to buy the next GOOG at the cheap and ride it all the way to stratosphere.

At IPO – investors seemed ok with defining long term for FB as several years. But that lasted only for a little time – now long term is just the next quarter as usual. Nothing about FB changed fundamentally, except for the controversy of allegedly not sharing all the information at IPO time . FB did not have a google-like billions of dollars revenue stream at the time of IPO, and it did not have one after the IPO.  It beat analyst expectations, but still managed to spook the street with cost increases, and lower slope of growth trends.  As always – one wonders whether tail wags the dog when it comes to the street and the public companies it covers. If you understand Malayalam – കൊണ്ടുനടന്നതും നീയെ ചാപ്പാ , കൊണ്ടുപോയി കൊല്ലിച്ചതും നീയെ ചാപ്പാ – is what comes to my mind in this context.

Stocks are compared against analyst estimates to determine what price it should be traded. For an established market – analysts have sophisticated market modelling techniques. For the “social” economy, it is hard to model a financial model like a “brick and mortar” economy.  GOOG makes most of its money through adwords – and analysts like that predictability. For now, FB makes its money via ads too.  If you judge FB on same parameters as GOOG – this stock will need to be punished even more I would think, given revenue – absolute numbers and growth –  is nowhere along similar lines as GOOG.

Why would anyone advertise on FB ? The best reason I could think of is CONTEXT.  FB might provide a better way to target the right audience for a given marketing message.  And more and more people join it every day. What I particularly like about the FB audience is that there are plenty of people there at an age group that has money to spend. As the line blurs between enterprise and consumer – I would expect that FB based marketing will pick up even more steam. The big question is – when will that happen?

I had dinner with a respected analyst and consultant few days ago in the bay area. He confirmed that he spends quite a bit on GOOG adwords, but nothing on FB advertising. I have heard this from several others since FB IPO. It just shows that FB has some ways to go in communicating to its stakeholders – developers, customers, investors et al.

That is where FB is facing some challenges today. The founder CEO is an atypical executive who cannot seem to be bothered a lot about answering questions that investors have about his company’s future. He controls vast majority of shares, so his hand cannot be forced in any way at the moment.  He is a product guy – and not a bean counter type.  He has hired capable executives for all jobs other than that of CEO. A big debate these days is whether he needs to hire someone else to do the CEO job.

This whole idea of “adult supervision” is not new. AAPL tried it when Jobs thought he needed another CEO. It didnt go too well for Jobs or AAPL. But when GOOG founders tried it with bringing in Schmidt, they had good success. There are other stories too like Yahoo’s founder trying to run the company a second time and then forced out – which makes me believe that a CEO change is not the magic bullet that will make it better for FB. If Mark Zuckerberg is smart enough to build FB to where it is today on his terms, I believe he can run it too on his terms. Even if a new CEO comes in, with his controlling shares in FB – Mr Z will still call the shots. So why bother? he has a  COO  and a CFO – why not empower them even more to deal with external world, while he can focus on making the product take its next leap?

Zuckerberg plays to his user base more than his investors. I cannot find a reason to fault him for that.  He prefers jeans to suits – big deal. Does wearing a suit make him a better CEO? If FB proves to be a success, Zuckerberg would have blazed a trail for many CEOs in future to choose a path that fits them, and not the street. If FB fails, I doubt it will be in large part because of CEO’s etiquette etc.  So in my opinion, he should not worry about fitting into the mold that the corporate world expects him to.

He does have to worry about talent though. With stocks tumbling, there is a real risk of his best talent jumping ship. Even if they don’t jump ship – they might lose motivation to do as well as they have done before. It is not a start up any more – that is history. In the new world, he needs a new version of future to keep his top talent from having other plans. If anything – that will be his true test of leadership. If he keeps his focus on retaining talent, and enhancing his product – I firmly believe, the street concerns will sort out itself. The funny part of retaining talent is that he would have faced the same troubles of keeping employees if they made their big millions, and then left the company to do their own thing, or to just retire young. Darned if you do, Darned if you don’t 🙂

There is a possibility that declining stock prices might make other companies decrease their use of FB as an advertisement vehicle. I seriously doubt that would be a massive problem though. A good example is Yahoo which made a profit even when everyone seemed to write them off.  Most users of FB would not care about who owns FB, or their stock price. Those are the users that advertisers will chase – and as long as FB does not decline in users, I doubt they will run into this issue.

With lower stock prices – there might be renewed interest for another company to acquire them. A hostile take over is not going to happen the way things stand now – but if FB people wants to cash out, selling out might be a very easy route to take in the medium term.

FB did not do its IPO enough justice. The price was set higher without enough justification. Then there were the waves of initial investors getting out, with probably couple more waves to come. The sheer number of shares made available makes the problem worse. In hindsight – they could have gone public earlier, so that investors could have moved up with a wave of increased user base these past 2 years. Or they could have remained public for a little more time while they figure out a sustainable business model and a story that the external investor world can understand. I guess greed and stupidity do have a tendency to go hand in hand.