Why Facebook Flopped

ICangles Communications Post…

The reason for the failure of the Facebook initial public offering can be summed up in a single word, mobile. Problems at Nasdaq, investment banker miscalculations, a share structure tailored to strip shareholders of traditional rights, concerns over the leadership abilities of a CEO actively articulating his disinterest in making money or even one of their biggest advertisers in General Motors pulling out on the eve of the deal because Facebook advertising was deemed ineffective certainly didn’t help. But all of these issues could have been overcome. What could not be overcome was the inability to communicate a viable mobile strategy.

Investors are willing to overlook a lot in return for growth and future profits. They will even put up with consistently losing money if odds are good for immense profitability down the road. The real problem for the Facebook IPO is that many investors believe that future growth in the technology sector is increasingly linked to mobile devices from smart phones to tablets. Unfortunately, Facebook has not been able to articulate a credible strategy for driving and monetizing mobile growth. The company has admitted it earns almost no money from its mobile advertisements. Without a realistic strategy to monetize mobile usage investors not only worry about the company’s financial growth potential, but its ability to remain a technology leader going forwarded.

Notwithstanding its problems, the Facebook IPO actually had a lot going for it. It’s hard to imagine an IPO that could have had much better name recognition. I was personally asked about it by people interested in buying shares to a greater extent than any IPO I can remember, including Google. But while reaching retail investors is important, individuals buying some shares for their personal accounts are not the class of investors who can make or break a stock. It’s the institutional investors who matter. The people managing money for others, professional money managers buying in bulk and the sell side analysts who advise them, are the ones who really matter when it comes to moving a stock. When institutions managing billions of dollars take a position in a stock they buy big or in the case of the Facebook IPO they mostly don’t buy.

And what financial professionals who follow technology stocks have been hearing all about for more than a year is mobile. Most of the investment presentations they are seeing and many of the earnings calls they are listening to are highlighting mobile as the focal point of future growth. This extends far beyond Apple, which has risen to the top on the surging sales of its smart phones and tablets. The focus on mobile  extends all the way down to the companies building semiconductor capital equipment, who highlight their exposure to the companies building the chips that are slated for the companies, like Apple, selling the mobile devices. To put it bluntly Facebook didn’t know its audience and the company’s investor relations communications did not adequately address the topic of greatest importance to investment professionals following technology stocks across multiple segments.

So great is the focus on mobile that in a short time it has become conventional wisdom that the future in the technology sector belongs largely to the leaders in mobile technology. Just as the move from the PC era to the Internet left even leaders like Microsoft struggling to regain their dynamism, and the subsequent move to Web 2.0 found companies, such as Yahoo floundering, the unfolding transition to mobile is expected to knock current leaders down and crown new ones.  Indeed, one analyst even predicted that Facebook would “disappear” in five to eight years to become another Yahoo, and while this assertion sparked controversy it was also considered credible by many in the analyst community. Unaddressed worries among investment professionals that Facebook’s best days for growth are more behind than in front of it with the onset of the mobile era are why its IPO, priced for strong future growth, flopped.

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