Facebook’s IPO and the Trouble with Free Media

As Facebook approached its initial public offering last week, observers couldn’t seem to decide whether the social media giant was a good investment. After the IPO, as the company’s stock price fell from its initial price, the debate continued.

To some people, the company’s decision to set its price at $38 a share looked like some serious overreach. After all, despite Facebook’s ubiquity in the lives of the computer-using public, it doesn’t generate anywhere near as much money as most high-profile tech companies. At Business Insider, Henry Blodget argues that the company is seriously overvalued, with a price 40 to 100 times its likely 2013 earnings, compared with multiples of 10 for Apple and 12 for Google.

But, at Seeking Alpha, Helix Investment Management makes the opposite case, contending that Apple and Google were more expensive when they went public. The post also argues that the simple fact that Facebook is making profits sets it apart from most social media companies. Still, even Helix qualifies its approval of Facebook’s stock, saying that investors will have to wait several years for any profit.

The fact that the stock didn’t “pop” with a brief price spike after the IPO has less to do with its actual worth than with its executives’ decision to set its price toward the high end of the price range they’d originally suggested. The fundamental value of the company will only emerge over time, and it’s going to depend on Facebook’s ability to make money from its users. It’s essentially the same problem that all social media, and all media in general, face.

Of course, Facebook, like most internet destinations, is free to users. And, as a popular adage has it, “if you’re not paying for it, you’re the product.” The resource Facebook can make money on is its vast stores of data about its members. So far, though, the money it makes on advertising isn’t terribly impressive. The question for the company is, how can it turn all that information into real money?

And, the question for potential investors is, is Facebook smart enough to figure out a good answer to that question?

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