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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

May 29, 2012 at 10:30 AM

Wall Street won’t ‘friend’ Facebook

The big talker today is Facebook stock falling below $30, down nearly 23 percent from its May 18th initial public offering price. This as the rest of the market was higher. Part of this is pure casino, with options traders distorting the price by making bets on the future direction of the shares; part a rumored and potentially costly acquisition of Opera Software of Norway. But the falling price continues to reflect the fear that there’s no there there.

How does Facebook make money? Mostly by selling ads on its site. In an incredibly crowded online media market where few large sites will make sizable, sustained profits from advertising. Indeed, one of the problems with the IPO is that information about softening revenue was apparently shared only with a select few investors. Just before the IPO, General Motors opted out as an advertiser. Even so, Facebook brought in $3.71 billion in revenue last year, had net earnings of around $1 billion. The growth has been fast. But can it be sustained?

Do you ever click on the ads on Facebook? It reminds me a bit of Krispy Kreme, which went public in 2000 to a rapturous reception. But how many donuts can you eat? Do you eat donuts?

Joe Nocera had a smart, contrarian take on Facebook’s IPO in the New York Times. The short-term playerz got burned, he argued, and the company benefited by raising more capital. He went on to note that the immediate market reaction doesn’t tell what the company will be in five or 10 years:

I could easily make a bullish case for Facebook — with its 900 million users, and its wise-beyond-his-years chief executive. I could just as easily make a bearish case: Maybe Facebook will never figure out mobile. Maybe its moment will pass before it ever becomes the kind of technology juggernaut that Microsoft once was, or Google is. But being either bullish or bearish requires making a judgment that is years away from being revealed. For bullish investors, it means holding the stock patiently, waiting for the judgment to pay off. That’s what good investors do.

Amen, brother. It’s what good investors should do. But the volatility and short-term focus of the Street gets more maniacal every year. The strategic moves that Facebook makes in the coming months will tell much. It may not have five years.

And Don’t Miss: The end of the euro: A survivor’s guide || Baseline Scenario

Today’s Econ Haiku:

Port or arena?

Infrastructure is the key

And we can have both

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