The Problem with Bubbles

What does Facebook’s disappointing IPO actually mean?

It seems to us that there are two ways of looking at it. If you take a glass-half-full approach, you could argue that any company valued at over $100 billion must be considered a success. Their profit margin, too, is grounds for optimism – in the 12 months prior to the IPO they achieved 26%, two and a half times greater than Google’s last privately filed accounts.

A half-empty approach, however, reveals a share price that only reached its initial IPO price of $38 with the intervention of the underwriters. Compare that with LinkedIN. The business networking site, which debuted on the stock exchange in May 2011, priced its shares at $45, opened at $85 and has required no external intervention. Even Groupon, whose stocks have since halved in value from the initial price of $20, managed to close at $31.14 on the opening day.

So what’s going to happen? The only sensible conclusion that can be drawn is that it’s too early to tell.

But there’s plenty of evidence to suggest that we’re overinflating the digital bubble, perhaps because it’s so consistently outperforming almost every other sector. To put it into context, Facebook has been valued at almost 24 times its annual sales revenue.

Can it perform with the same consistency and with the same dominance, for the next quarter of a century? 25 years ago, the existence of the World Wide Web wasn’t public knowledge. A lot can change.

One digital sector whose future is secure, though, is e-commerce.  E-commerce and online retail will keep succeeding because that business model has been tried and tested for millennia. In e-commerce, the internet is just a facilitator, a way of reaching a consumer – the goods tend to remain a physical product or service.

Facebook’s product is the crowd and, after a while, crowd’s disperse, as surely as bubbles burst.

To find out how to optimise your e-commerce operation, get in touch with Ve Interactive.

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