The filing of the Facebook Prospectus has been greeted with the equivalent of the Hallelujah chorus of Handel's Messiah — all soaring trumpet, harmonious voices and thundering D-Major chords. A great rejoicing among analysts, investors and journalists. Unto us a highly profitable company with killer margins, global reach and great potential is born. A $100 billion baby. It's the Zuck-potheosis.
The reaction leaves me a little cold. Sure, here and there, voices of caution can be heard. At Business Insider, my colleague Henry Blodget cogently argues that Facebook is probably worth $75 billion, rather than the $100 billion figure that's being tossed about. But while splashy, much anticipated debuts tend to bring out boo-birds as well as cheerleaders, discouraging words have been few and far between. Where are all the contrarians? The doomsayers? The professional skeptics and short-sellers? The Facebook bears?
Google killed them.
Let me explain.
There are a few reasons to be skeptical of the Facebook offering. One dynamic that has changed from the bad old days of the 1990s is that the frothy, bubbly activity now takes place in the private market. In the original dotcom boom, start-ups would raise a few rounds of venture capital. Then, several months later, all the pent-up demand from institutional investors, hedge funds and individual investors would bust out at the public offering, causing a huge pop. But today, there are robust private markets for privately held companies like Facebook, such as Second Market, where shareholders and employees can sell shares. And over the last several years, a series of investors — Microsoft, Goldman Sachs, venture capital firms, mutual funds — have bought into Facebook at ever-higher valuations. This process allows the value of hot companies to soar before an IPO, which leaves less upside when the company finally goes public. (See under: Groupon.) Last January, when Goldman invested in Facebook, the implied valuation was already up to $50 billion.
Second, Facebook is an enormously successful company. Just eight years old, and with billions of human beings yet to open accounts, the company has immense room for growth. But the remarkable growth it has already experienced means that Facebook may struggle to sustain the momentum. Check out page 40 of the prospectus. Revenue growth in the last few years has been impressive, but the rate of growth is declining, as one might expect: 185 percent in 2009, 154 percent in 2010 and 89 percent in 2011. Now look at the quarterly data on page 54. In the second, third and fourth quarters of 2010, the quarter-on-quarter growth rates were 25 percent, 8.3 percent and 56 percent, respectively. In the second, third and fourth quarters of 2011, the comparable rates were 22.4 percent, 6.6 percent and 19 percent.
Third, I still find the business a little problematic. Facebook sells extremely cheap ads against junky content. I'm still not sure how the company monetizes eyeballs — I've never looked at or clicked on an ad on Facebook. Many of the members masquerading as 20-year-olds consumers with purchasing power are in fact 13-year-olds. And analysts are banking on the company's ability to sell information about users to companies without suffering a significant backlash. Yes, Facebook has killed off most of its competitors and emerged as a remarkably powerful platform for economic activity, and that's great. But juggernauts have a way of running into brick walls. Check out Google's long-term chart. The stock trades below where it traded in mid-October 2007.
So how did Google mute the Facebook skeptics?
Muscle memory is a powerful force in finance and opinion. Back in August 2004, when Google was preparing to go public, the memory of the dotcom disaster was fresh in most people's minds. In the late 1990s, the financial and media establishment, with a few notable exceptions, bought into a series of absurd stories — Pets.com, Webvan, valuing companies on eyeballs, Internet incubators. And while the ruins of the crash were still smoking, here came another dotcom out of Silicon Valley, founded by two engineers from Stanford, bearing a funny name and promising growth to the sky. The underwriters wanted investors to pay $85 per share?
While there were plenty of Google boosters, there was also plenty of skepticism. A massive valuation for a company that relies on text-based Internet ads for its revenues? We wouldn't be fooled again. And so Google's debut was comparatively modest. The stock, priced at $85, opened at $99 and closed its first trading day at $101.51, up 19.4 percent from its offering price. A nice pop, but nothing remarkable.
Of course, in the years since the offering, Google has defied the skeptics and the short-sellers. Unlike so many of the high-flyers of the dotcom era that crashed to earth, Google had a superior business model and executives capable of executing, and it reported impressive profits. And so as the years went by, the stock soared, breaking through 200, 300, 500, 600. Google broke into new markets and developed new products, and proved it was a valuable platform for other businesses and companies. Seven-plus years into its life as a public company, Google is healthy and thriving.
This is the lens through which we now view Facebook. We're looking at the hot company through Google goggles. In 2004, people feared Google might be the next Webvan. In 2012, they're hoping Facebook will be the next Google.
Daniel Gross is economics editor at Yahoo! Finance.
Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com.
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