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August 16, 2012

Death of the social media IPO?

After Facebook’s lacklustre IPO performance and a disappointing first earnings report, sceptics are claiming Facebook is an indicator that social media IPOs are coming to a dead end.

By Tineka Smith

Some analysts predict the social media investment frenzy has run its course and that the market reaction to the Facebook IPO is a strong example.

Analysts at Magister advisors predict smaller, specialised social media companies will merge together to gain scale rather than facing an IPO alone.

Victor Basta, managing director of Magister Advisors says that an outcome of the soon to be "grand-daddy" trend would be a sale of Facebook to Google, especially if its stock value continues its downward spiral.

"Facebook is currently valued by the market at around a quarter of the value of Google," said Basta. "If the share price drifts any lower, Facebook starts to answer Google’s questions about its social media strategy at a compelling value. Clearly there would be regulatory issues, but a deal would be compelling for both sides."

IPO markets were expecting the social network to blaze the way for successful social media IPOs instead of falling flat. The company’s massive overvaluation proved to be one of its biggest downfalls.

Magister Advisors predict that Facebook will consolidate through a merger or acquisition in the future.

"The land grab for a potentially lucrative user base is now largely over and the challenge now is flip ‘potentially lucrative’ into ‘plain old lucrative’," said Basta. "We forecast that the rush will be on to consolidate through M&A within the social media ecosystem. If Facebook had [sic] IPOed at a more realistic valuation, the dynamics might well have been different, but this market is now all about M&A."

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Facebook’s earnings report shows its revenue growth was the slowest since its first quarter in 2011. The social network’s revenue was up by 32% totalling $1.18bn compared to $895m in the second quarter of 2011, however, its capital expenditures more than tripled to $413 million in the second quarter.

The company reported a net loss of $157m in the second quarter compared to a net income of $240m in the same quarter a year ago.

Although the company is growing at a faster rate than even Google, its valuation does not reflect its earnings.

"The valuation will have to settle down substantially unless Facebook achieves a miracle and finds a revenue stream that will multiply its revenue ten-fold," said Basta. "That, frankly, would be unprecedented – equivalent to calling in a ten-fold uptick in favours from everyone in the Facebook neighborhood."

According to Magister Advisor’s, Google’s recent acquisition of social media advertising company, Wildfire, is a direct threat to Facebook’s future revenue.

"Facebook’s difficulty is that it is not a sales-driven business in the way that Google has become" said Basta. "Facebook is more about products than sales."

Magister analysts also predict that the popular microblogging service, Twitter, will be unlikely to go public anytime in the future. The site has yet to monetise its user base and with social media IPOs like Facebook, investors will be more critical on whether social media companies can make money quickly.

Please follow this author on Twitter @Tineka_S or comment below.

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