Reasons To Avoid Facebook
Reasons To Avoid Facebook It's hard to imagine an initial public offering
(IPO) as heralded as Facebook's. Even Microsoft's 1986 debut (at $21) didn't
garner this much attention. It's rare when a product or service that's so
ubiquitous and so central to people's day-to-day lives, becomes available for
the public to purchase a position in. Imagine if our Cro-Magnon ancestors
had found a way to securitize fire or the wheel.
Liberal estimates set Facebook's upcoming book value in the exospheric
12-digit range. One fun side effect to a well-publicized IPO is that it gives
prognosticators who have no skin in the game of chance to make unrealistic
estimates about the company's market value. $100 billion? Sure, why not?
Sounds more memorable than $7 billion or $11.9 billion. Neither of which
would make a memorable headline, be easily rattled off by journalists or make
a good follow-up story a few months later, when Facebook's book value peaks
without ever approaching $100 billion.
Prices are opinions, we know that, and they often have little correlation to
value. No less an authority than Adam Smith himself pointed this out,
observing that diamonds are expensive yet have little intrinsic value, while
water is vital and essentially free. So what of Facebook, which is little more
than a glorified contact list interspersed with baby pictures and Zynga games?
There are 845 million people that spend time on Facebook, or at the very
least, have accounts. So, does that mean each one is worth around $118, and if
so, to whom? Or is this a case of unnecessarily dividing one number by
another? Even if the average Facebook user posts every conceivable detail
about their life, could an ambitious marketer or advertiser get $118 of added
value out of that? These aren't rhetorical questions, these are questions a
conscientious investor needs to ask before going long with an overpublicized
company, whose business model is easily replicable; and if you don't think
Facebook can be replicated, ask the good folks at MySpace or Friendster.
Facebook's revenue stream is based solely on advertising; facebook doesn't
sell anything directly. It's a lucrative advertising vehicle, to be sure, with over
$3 billion in advertising revenue last year.
By far the biggest American IPO in history was that of VISA in 2008. Not that
longevity is a necessary condition for success in the marketplace, but VISA
was a decades-old concern with millions of paying subscribers, both on the
cardholder and merchant sides, before going public. VISA's IPO was valued at
$17.9 billion and four years later the company's book value sits at about a
healthy $78 billion.
The next largest IPO in history (among those companies that still exist in the
same form, thus excluding AT&T Wireless and General Motors) was that of
Kraft Foods in 2001 at $8.7 billion. Again, a company that produces a tangible
asset and with significant barriers to entry. Facebook has announced that it
hopes to raise approximately $10 billion when it first trades publicly, a bold
statement that any investor should take under advisement.
This represents 99% of Facebook posts, from our unscientific observations:
"Here's a pic of my daughter in her princess Halloween costume!!!!!!"
And this represents 100% of the resulting social interaction (rounding to the
"OMG so cute!!!!!"
"Lindsey yor daughter is SOOOOOOO cute!!!!"
"SO cute lol"
"I made my daughter a similar costume last year! So cute!"
Meanwhile, one of America's most profitable companies, ExxonMobil, got that
way by refining and distributing a product that most people can't live without.
Around 1998, when the public at large started to use computers for reasons
beyond storing recipes, AOL represented most people's first exposure to
online access. Back then, receiving email (or having any contact whatsoever
with someone else without having to resort to telephone or face-to-face
contact) was excitement writ large. The comparison with Facebook isn't a
perfect one, but public mania helped AOL grow so quickly and so large that it
bought and rebranded communications leviathan Time Warner. Within two
years, AOL had surrendered $200 billion in market value and suffered some
of the biggest losses in the history of commerce.
AOL developed something called the "walled garden," inaccessible to general
Internet users. Once AOL's subscribers realized there was an unrestricted
world beyond its boundaries, those subscribers left in droves. Today,
Facebook operates in a similar fashion, yet members continue to patronize
Naive individual investors think that it's possible to buy Facebook stock the
day it goes on sale, hold onto it for an undetermined period then cash out, but
IPOs rarely work that way. The lead underwriters stand to profit first, then
their clients, then institutional investors. By the time Joe Investor places his
order, Facebook's share price will likely have risen. With the stock in hand,
"timing the market" becomes exceedingly difficult with such a short window.
Hold onto Facebook for several hours? A day? Or ride it as a potential blue
chip investment, holding it for years? The intelligent investor has already
answered these questions before deciding to buy the stock. Especially a stock
that has never traded before.
The Bottom Line
Facebook is a fantastic time waster, perhaps the greatest ever devised. It
easily beats out the previous record holders going back throughout history:
it trumps television, talking on the phone, golf, chess, trying to teach cats to
obey simple commands, and getting drunk combined. But as an investment,
the risk of buying Facebook stock could prove to be greater than any
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