NEW YORK (Real Money) -- Tuesday's news that General Motors (GM) is cutting ad spending on Facebook (FB) was a huge shock to most casual investors. The concern among Facebook skeptics is whether GM is the canary in the coalmine leading other big ad spenders follow suit. Facebook has tried to spin this development by countering:
- GM was only spending $10 million a year.
- Ford (F) is happy with its return on investment, so GM must be doing something wrong.
- The timing of the leak to the Wall Street Journal implies it's coming from someone trying to embarrass Facebook.
- It's still early for ads. Facebook is not even trying and posted $3.7 billion in revenue last year. Imagine what it can do when it gets its act together.
All this is true; however, is it still cause for worry? Of course it is. GM is a huge advertiser. Something is wrong if Facebook is arguing that GM is too stupid to advertise on its website.
It's also puzzling that GM spent $30 million in the past year on agencies to help do its "free" Facebook site, but only spent $10 million on Facebook itself.
Maybe Facebook will start charging companies like GM to do this, thereby transferring agency revenues into Facebook's coffers.Maybe. But why hasn't it done that already? Because Facebook wants to get people hooked and not try something instead of Facebook. So what does this mean for Facebook's debut Friday? It should take a little air out of the tires. I heard someone comment two days ago that this IPO could touch $200 billion. I don't see that level of exuberance. Even if Greece continues to get all the business news headlines and now with this GM news out there, I don't expect the people who want to buy Facebook to be deterred. In their minds, Facebook is still at the beginning stages of a huge run and the best time to buy is right at the start. I believe we're still going to see the deal price at a valuation of about $120 billion Thursday night and trade up to $150 billion Friday but close at around a $140 billion valuation, representing a first-day gain of 17% -- slightly less than Google's (GOOG) 18% IPO gain. The world will be watching.
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