Tracking the right metric

Last week I wrote about the Facebook IPO and how I felt that for the company the shift to stock price metric tracking was a big deal. I said that there has been a shift from what Facebook was and could be to the broader public to how all of its actions impact the stock price for the company. Today, in an article on Forbes they published an article about the impact of what you measure and how it impacts later choices. One of the things they didn’t mention was how frequently this measure or metric is reported. These all matter.

Looking at Facebook, I think it’s rather clear why Zuckerberg has publicly stated that he doesn’t care about the stock price of the company. Stock price is continually reported and when major milestones are passed, either in the positive or negative, everyone is talking about it. Apparently, Facebook dipped below $30/share today. Is this the end of the world? No, but it does mean that a lot of people have lost a lot of money.

Let’s look at stocks. Do they truly reflect the value of a company? I, personally, don’t think so. There are so many factors that shift the price of a given stock in a week, that it’s impossible for the value of the company to fluctuate in such a manner. However, the price of a stock does impact what a business is able to do. Companies are able to leverage their stock values for loans and interest rates, which means that a company can suddenly gain or lose market capital if the stock market swings for something completely unrelated to them and investors sell of their stock.

Despite the fact that, at best, there’s a loose correlation between the actual value of a company and the price of its stock, CEOs are held accountable to this metric by investors. Now, maybe some CEOs do ignore the value like Zuckerberg plans on doing (I’ve heard Jeff Bezos from Amazon does), however, when it’s continually reported and discussed it likely will change some behavior even if the CEO does their best to ignore the stock price. Even if the CEO does ignore it, in many cases the board or the investors will not. They may take serious action if the CEO does not work to ensure that their metric, stock value, continues to increase.

However, this may drive the wrong behavior. Tracking the wrong metric may be answering the wrong question. What increases our stock price may not be the same answer to what keeps our company competitive. A company that reduces work force to cut expenses for the end of the year, may seriously be hampering their ability to compete over the next few years. The change will likely bolster the performance of the stock in the near term but will likely lead to greater drops in the medium or long term.

Company management should not solely be measured on stock price alone and neither should a company. As much as I dislike Facebook and Mark Zuckerberg, Facebook is a company that actually has more value than simply its bottom line. It is able to create new networks and new places for activists to work. Now is this likely to continue? I don’t know. Could another company come along and beat them at it? Definitely. That’s why Facebook bought Instagram and will likely buy other companies that could threaten their market space.

Facebook, IPO and valuing a company

This week we’ve been hearing about the debacle that was the Facebook IPO.Which has revealed that some of the underwriters for the IPO were doing shady things. Matt Taibbi believes that this indicates that there are essentially two markets. One for the insiders and one for the schumcks, the every day investors.

Why is this important? Well, based on the discussions I’ve read online, there’s a lot of concern of the validity of the whole IPO process, the valuation methods of companies and how investors think of companies. The valuation of Facebook had a great deal of discussion before the final IPO price of $38/share, this was partially driven by two articles that came out. In the first one it was mentioned that GM was pulling it’s account because “Facebook ads don’t work.” The other article of note relates that researchers found that 44% of Facebook users will NEVER click an ad. This research is important because some of the valuation is based on the conversion rates of ad views to ad clicks. On average Facebook was only able to earn around $4.34 per user. The valuation of $100 billion puts the life time earning potential per user at $100 (at 1 billion users). This is pretty low, but at the same time, if only 560 million users ever click ad, that pushes means the people that do click ads need to be earning Facebook roughly $200.

MIT Technology Review discusses how this is an unsustainable growth model for Facebook. Essentially, Facebook will begin to drive down the cost per view for their advertisers to try to increase their total revenue. This falls into the race to the bottom mentality that crushes industries. Advertisers will be able to say to any website, why should we pay you x amount per ad when we only pay Facebook y there is no way that you can get me more views than Facebook. The only way that a site could get more revenue if they can show data for a higher click through and conversion rates than Facebook. That might be tough. The Review article argues that this will eventually kill Facebook and a lot of the ad driven website business models.

The other aspect of the IPO is a difference in the way that business and technology media are reporting on Facebook. Things have shifted from all the non-business related activities to focusing solely on this aspect of Facebook. This will likely shift over time, but I believe that these considerations will be discussed in any article related to Facebook. If Facebook wants to remain a haven for activists it will be difficult if there are potential suits over people being activists. There will be an increase of risk aversion within the “owners” of the company as there will be influence from investors.

Zuckerberg has said that he plans on doing what is best for the long term and try to ignore the demands of investors. He might be able to do that because he still owns 57% of the voting rights for the company. However, it will be difficult for him to avoid the influence of the discourse of media outlets. Even if he gets all his news from his friends on Facebook, there will likely be articles posted that will give him news about the company and things that he probably won’t want to read.

Essentially, discussions will shift from being about the risk of privacy for users to how changes to Facebook will impact investors bottom line. I don’t think this is healthy for businesses, consumers of Facebook or the general public. There are other things companies do that are unrelated to investors that are important for society as a whole. The Facebook coverage really indicates that we don’t look at businesses in a long term sustainable manner. We need to change this if we want to save capitalism.