A little more talk about Facebook shares and the future

Facebook shares and the future were the subject in September 2012. The share price had fallen sharply after the flotation, but I still believed in the company’s opportunities. I owned around 5,000 kroner in Facebook shares myself and wanted to explain what I saw in the business.

These are my thoughts, guesses and expectations from back then. This is not a current recommendation to buy or sell shares, and the future plans below should be read as the possibilities I imagined in 2012.

Facebook shares and the future were two different questions

I referred to an earlier video in which I had said Facebook might be worth 100 billion. I still believed that. Some would say the falling share price proved me wrong. I replied that this was not how I looked at shares.

For me, the share price expressed the market’s expectations for the future. I said the price was a little under half its opening level, but did not think that settled the company’s long-term prospects.

That was my assessment of the difference between the current market price and the potential I imagined. I could not substantiate what the right price should be.

Lock-ups and employee shares were part of my explanation

One of my explanations for the fall was that insiders could now start selling shares. I mentioned executives, employees and former employees with shares or options.

I used a hypothetical example of an employee who had ordered a Ferrari or bought a house on the strength of expected wealth. Then came the problem: the shares could not necessarily be sold straight away.

I explained a lock-up as a period in which selling was restricted, mentioning three or six months as typical examples. I said many people could now sell. That was my broad explanation of the situation, not a review of the specific agreements and expiry dates.

If someone had already committed the money, I felt they might have to sell even if they really wanted to keep the shares. I had not investigated how many employees had actually done so.

The market could expect a larger supply. At the same time, there were doubts about Facebook’s value, which I felt could dampen demand. That was the combination I used to explain pressure on the share price.

I also said the fall could easily continue. My optimism was not a statement that the bottom had already been reached.

I disagreed with the concern about mobile

Another part of the debate was about users moving to mobile phones, where you could not show the same large adverts. I felt some analysts were looking at it far too narrowly.

I was very crude about people in suits and ties and their ability to understand the company. That was my polemical reaction, not an assessment of every analyst’s work.

I mentioned my own shares to show my interest in the subject. I did not think my small audience could move the share price significantly, even if everyone bought at once. I was not proposing an organised purchase.

I muddled my explanation of P/E

I brought up price/earnings, P/E, which is the relationship between the share price and earnings per share. In the video, I initially mixed up revenue and earnings and said myself that I was not good at explaining it.

I loosely used the idea of how many years of earnings it would take to match the market value. That comparison is not a promise that an investor will get their investment back within a certain number of years.

I compared it with Apple, but did not know exactly what the figures were. I used about 20 as a hypothetical Apple figure and around 36 for Facebook. They were not verified financial ratios in the post.

My point was the calculation at an unchanged price: If earnings doubled, a P/E of 36 would become 18. If they tripled, it would become 12. Of course, that assumed everything else in the example stayed the same.

I thought substantial growth in profits could change the market’s view of the shares. I said very optimistically that the price could explode. That was an expectation, not a certain consequence of a financial ratio.

I saw Zuckerberg as a man with a long-term view

I felt Facebook had only begun to exploit its opportunities to make money. I saw Mark Zuckerberg as someone working for the long term rather than maximising the next quarter’s profit.

I compared it with Amino, where we were not only looking at immediate profits either. We thought about how we created value for users.

At the same time, I said nobody knew whether Facebook would succeed. Some announced plans and some possibilities I could imagine were what made me interested.

A want button could tell you more than a like

I talked about a possible new button, which I called the want button. I expected it might arrive within weeks, but that timing was my guess in the video.

The idea was that an online shop could put the button beside its products. A user could then indicate that she wanted a pair of expensive shoes, even if she could not afford them.

I used shoes costing around 6,000 kroner to illustrate style, taste and the identity you wanted to show others. Like a like, a want could become a signal of who you wanted to be.

I also made fun of the difference between pressing a button and actually doing something. I mentioned liking animal welfare while buying chicken that I felt had been produced under poor conditions.

I brought up the Kony debate as another example and guessed that very few people had turned up for a demonstration. I did not document the attendance. It was my harsh illustration of how a click was easier than taking the bus into town, donating money or making an effort.

I also made crude generalisations about people on social assistance and their desire to signal something through expensive products. That was my rhetoric, not a study of that group.

Product wishes could be valuable information

What interested me was that such a button could give Facebook more detailed knowledge of what users wanted to buy. I imagined that knowledge could be used commercially and to show more relevant adverts.

My example was cheaper shoes for someone who had indicated an interest in an expensive pair. I also mentioned counterfeit goods and made the very crude claim that Facebook and Google happily took money from those advertisers despite officially opposing them.

I did not present evidence about specific advertisers or the companies’ motives. It was a polemical attack on the advertising market, not a finding of a particular illegal agreement.

I imagined an advertising network beyond Facebook

My other big idea was a system similar to Google AdSense: adverts that could appear on other websites and generate revenue for both the platform and the site showing them.

I set out a deliberately exaggerated calculation. If Amino earned one krone per thousand Google impressions but ten kroner per thousand Facebook impressions, of course I would consider switching. I said myself the figures were exaggerated. They were not actual payment rates.

Why did I think Facebook might be better at targeting? I imagined a user pressing want on an accounting system such as e-conomic and later visiting Amino.

If a competitor such as Visma advertised through Facebook, the user might get a relevant advert on Amino. He had already shown an interest in that kind of product and could therefore be an interesting potential customer.

That was a hypothetical sequence using companies as examples, not a description of an agreement they had entered into. I used it to show how a user’s signal in one place could make adverts elsewhere more valuable.

Mobile was my Trojan horse

I called the mobile phone a Trojan horse and the ultimate tattletale in your pocket. I felt its value to Facebook could lie in the information, even if the user did not see the most important advert on the phone.

I mentioned likes, product wishes, check-ins and geographical location. I imagined a picture of the shops and cinemas you visited, the pages you viewed and your interests.

I also talked broadly about gender, relationships, finances and political interests. In the video, I described the data collection in very sweeping and categorical terms. I did not go through settings, permissions or technical limitations, so it was not a precise description of what Facebook actually collected from every phone.

My business idea was that information from mobile phones could make adverts on an iPad, a computer or another website more targeted. That was why I did not think the question of large adverts on a small screen explained the whole potential.

I had already started paying for visibility

There was also something concrete from my own everyday life. I had paid Facebook to make my posts more visible in followers’ feeds. Provocatively, I called it bypassing their spam filter and becoming a top story.

I said it had initially cost me 25 dollars, later 50 and then 75. Then I had seen 50 again. I took that to mean Facebook was testing prices between 50 and 75 dollars for a page of my size.

That was my observation of the offers I received at the time, not a general or current advertising price. I said that, together with Amino, I might have spent around 2,000 kroner over a few months, having previously spent nothing.

I knew other business owners who, as I recounted it, had also started spending 500 or 1,000 kroner that way. I thought it was easy once you had a page. Read also E-pusher about selling and marketing online.

It made me see professional users as a potential goldmine. Meanwhile, ordinary users created the content and provided the signals that could make the adverts relevant. That was the interaction I felt some critics overlooked.

My optimism also came with a condition

I admitted that I only understood part of it all, but was very convinced about the direction. I even boasted that my explanation was better than the average analyst’s. That was my confidence and rhetoric in the video.

I said I would buy more Facebook shares when I felt I could see the price levelling off and starting to turn upwards. I mentioned 18, 10 or 8 as possible levels and later hoped for 40, 50 or 60.

That was my own hypothetical plan and share-price guess from 2012. I could guarantee neither a bottom, a turning point nor a future profit.

I also included a caveat: It could go wrong as it had with MySpace. If Zuckerberg left and new management, in my view, started milking the company quarter by quarter with shareholder value as its only focus, I would sell.

As long as he was in the company and I saw a turnaround, I would buy myself, I said. It was that combination of user data, advertising opportunities, my own experience of paid visibility and belief in the long term that explained my optimism back then.