Facebook status: down, but far from out

Reasons to be upbeat.

The fever pitch of speculation building up to Facebook’s IPO less than a week ago has been replaced by doomsayers revelling in the 11 per cent price slump since Friday’s launch. Should Mark Zuckerberg and the rest of Facebook’s newly minted billionaire founders, and almost 1,000 paper millionaire employees, be concerned by the drop since listing? No, there are several reasons to be upbeat.

The doomsayers have loved the downward stock slide. Stories of the NASDAQ’s technology wobbles and Morgan Stanley having to keep the stock price up soon after its listing are what you’d expect. People love the fact that the bigger they are, the harder they fall.

But there are several reasons for Facebook’s stockholders to take heart.

Firstly, let’s not forget Facebook’s $38 listing price was well above its initial expectations. Only weeks before the May 18 IPO, it was forecast to sell 337.4 million shares for between $28 and $35 per share, raising between $9 bn and $12 bn.

Five days before the list date, it raised the total number of shares to 421.2 m and ended up listing at this much higher level – netting $16bn and giving it a market capitalisation of about $104bn at listing.

To put this into context, Google offered 19m shares in its 2004 IPO, listing at $85 per share. It raised $1.67bn on market capitalisation of US$23 bn.

This gave Google the war chest it needed to launch a vast slew of mergers and acquisitions in the following years, including the high-profile purchase of YouTube in 2007.

Facebook’s IPO has raised 10 times Google’s amount from the sale, with market capitalisation three times Google’s – giving a serious steroid boost to its M&A budget. Facebook’s pre-IPO purchase of Instagram will be the first of many, helping the world’s most well-known social networking site, cement its market-leading position.

Interesting research from boutique researcher WealthInsight, The Facebook Elite, suggests that even if Facebook’s IPO may be overpriced, it does not mean that the company is not highly valuable.

Facebook’s earnings were $972m for the 12 months up until March 2012. Off revenue of $4.0bn, this represents a high profit margin of 24 per cent, putting it in line with the likes of Apple (30 per cent) and Google (27 per cent).

Facebook also makes more money from advertising than any other website and accounts for 28 per cent of display ads seen online. As more and more advertising moves online, Facebook’s revenues will almost certainly increase. Facebook had 901 million monthly active users (MAUs) and an average of 526 million daily active users as of 31 March 2012, an increase of 33 per cent and 41 per cent, respectively, compared to March, 2011. At the same time, Facebook’s 60 per cent penetration rate of internet users in the US and 45 per cent penetration rate of the world’s 2 billion internet users, together suggest that Facebook’s user base still has significant room for growth.

Facebook’s stock price will continue to attract attention, and will no doubt suffer periodic dips. Google suffered a big drop in late 2008, but now sells for more than $600. Facebook’s stocks may have dipped, but they are likely to rise far further.

Nicholas Moody is the editor of Private Banker International at VRL Financial News. He has written more about Facebook's recent venture here.

Photograph: Getty Images
Photo: Getty
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Forget planning for no deal. The government isn't really planning for Brexit at all

The British government is simply not in a position to handle life after the EU.

No deal is better than a bad deal? That phrase has essentially vanished from Theresa May’s lips since the loss of her parliamentary majority in June, but it lives on in the minds of her boosters in the commentariat and the most committed parts of the Brexit press. In fact, they have a new meme: criticising the civil service and ministers who backed a Remain vote for “not preparing” for a no deal Brexit.

Leaving without a deal would mean, among other things, dropping out of the Open Skies agreement which allows British aeroplanes to fly to the United States and European Union. It would lead very quickly to food shortages and also mean that radioactive isotopes, used among other things for cancer treatment, wouldn’t be able to cross into the UK anymore. “Planning for no deal” actually means “making a deal”.  (Where the Brexit elite may have a point is that the consequences of no deal are sufficiently disruptive on both sides that the British government shouldn’t  worry too much about the two-year time frame set out in Article 50, as both sides have too big an incentive to always agree to extra time. I don’t think this is likely for political reasons but there is a good economic case for it.)

For the most part, you can’t really plan for no deal. There are however some things the government could prepare for. They could, for instance, start hiring additional staff for customs checks and investing in a bigger IT system to be able to handle the increased volume of work that would need to take place at the British border. It would need to begin issuing compulsory purchases to build new customs posts at ports, particularly along the 300-mile stretch of the Irish border – where Northern Ireland, outside the European Union, would immediately have a hard border with the Republic of Ireland, which would remain inside the bloc. But as Newsnight’s Christopher Cook details, the government is doing none of these things.

Now, in a way, you might say that this is a good decision on the government’s part. Frankly, these measures would only be about as useful as doing your seatbelt up before driving off the Grand Canyon. Buying up land and properties along the Irish border has the potential to cause political headaches that neither the British nor Irish governments need. However, as Cook notes, much of the government’s negotiating strategy seems to be based around convincing the EU27 that the United Kingdom might actually walk away without a deal, so not making even these inadequate plans makes a mockery of their own strategy. 

But the frothing about preparing for “no deal” ignores a far bigger problem: the government isn’t really preparing for any deal, and certainly not the one envisaged in May’s Lancaster House speech, where she set out the terms of Britain’s Brexit negotiations, or in her letter to the EU27 triggering Article 50. Just to reiterate: the government’s proposal is that the United Kingdom will leave both the single market and the customs union. Its regulations will no longer be set or enforced by the European Court of Justice or related bodies.

That means that, when Britain leaves the EU, it will need, at a minimum: to beef up the number of staff, the quality of its computer systems and the amount of physical space given over to customs checks and other assorted border work. It will need to hire its own food and standards inspectors to travel the globe checking the quality of products exported to the United Kingdom. It will need to increase the size of its own regulatory bodies.

The Foreign Office is doing some good and important work on preparing Britain’s re-entry into the World Trade Organisation as a nation with its own set of tariffs. But across the government, the level of preparation is simply not where it should be.

And all that’s assuming that May gets exactly what she wants. It’s not that the government isn’t preparing for no deal, or isn’t preparing for a bad deal. It can’t even be said to be preparing for what it believes is a great deal. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.