Facebook IPO: Bubbly moment? Maybe just bubble…
This week’s blog entry is a summation of the week’s top stories more than anything else. So consider yourself lucky: you’ve been spared my usual long-winded battery of a rant (for at least another seven days at least).
I suppose the biggest news – although talk has been rife for a while – is the announcement of a Facebook float. An estimated $80bn float to be precise, in which Mr Zuckerberg will net about $22.7bn. Even the decorator of old Facebook HQ is set to profit – the local graffiti artist was paid, in shares, to spray-paint a couple of walls; those shares would see him net $200m, which technically makes his work one of the most expensive pieces of artwork ever created. Now this got me thinking: is Facebook overvalued as a financial entity, how on Earth can it be worth so much and is the market oblivious to the mother-of-all-bubbles?
Last year saw Facebook revenues hit around $3.7, with after-tax profits of £1bn. These figures are a fraction of its market valuation. The issue is really whether turnover can be expected to realistically increase at a constant, ever-continuing rate in order to justify the marked difference is valuation and revenue. The trouble is figuring out where long-term growth and revenues will come from. At present this is from click-through advertising, which is (a) in the case of Facebook, low, and (b) unreliable in the short-run, let alone the long-run. Related to this is an increase in user numbers, although barring a sudden appearance of millions of potential users, this seems even less likely. Dare I say it, Facebook is reaching the peak of its power and is surely a steer-clear for savvy investors looking for a viable portfolio stock. Stick to Vodafone.
In other news, the Bank of England announced another round of quantitative easing, to the tune of £50bn. QE’s effectiveness has been greeted with scepticism – the idea of the Bank buying back gilts from banks in return for money should, in idealist theory, fill up banks’ books with highly-liquid cash and encourage lending to businesses and households. This is key to kick-starting the economy. However as pointed out by ex-MPCer, Sushil Wadhwani, the realised effects can be suggested as being minimal. Banks would prefer to bolster their balance sheets rather than increase lending. Joe Public and the economy sees no material gain. Another concern brought to light this week is the effect on pensions/annuities. With the value of annuities bought on retirement being based on returns from gilts, a buying-up by the Bank will inflate prices and depress interest paid out. The result is a lower pension. Perhaps the Bank should do as Mr Wadhwani suggests and give us all a voucher to spend as we please – that way QE will actually produce visible results in the wider economy.