Facebook IPO: I just don't get it.

[vrDrew]

Facebook is widely expected to file for its Initial Public Offering sometime in the next two weeks. And it is also expected that it is planning on selling the shares at a price that would value the company at more than $100 billion.

Every which way I look at this offering, it seems to me that this is destined to end up as one of the biggest boondoggles ever to appear on Wall Street.

Some basic facts: While Facebook has very rapidly grown to have almost a billion users, it simply doesn't have that much in either revenue or profit: Roughly $4 billion revenue, and roughly a billion in profit. In order to be worth that ~$100 billion valuation, Facebook would need to grow its profits at least ten times.

I just don't see any way that is going to be possible. Its never going to have 10 billion users (there aren't that many humans on the planet.) And its going to face increasingly stiff competition as it tries to increase the revenue per user it earns. On the one hand, it can't simply splash ads all over its pages without turning off its users. And it can only go so far in using its user data to sell targeted ads, without risking a privacy backlash. And lets also recognize that its going to be competing for online ad dollars against Google - which is hardly a slouch in that department.

Some other problems: More online activity is moving into the mobile sphere. An arena Facebook has virtually zero experience making money.

In order to rationalize a $100 billion valuation, Facebook is either going to have to provide roughly $20 of "value" to 2 billion users (the theoretical upward limit of global users with access to the technology and spending power necessary) - or its going to have to provide $40 of value to its existing billion users. Last year it earned about $4.

We won't even get into the terrible risks inherent in investing in a company where the founder (Zuckerberg) minority shareholding gives him pretty much absolute control forever. Even if he royally screws things up, there is virtually no means whereby shareholders can vote themselves new management to fix the mess.

Please give me a reason to believe that the Facebook Emperor isn't walking around naked as a jaybird.

 

[Tarzanman]

Long story short... the foxes are the ones guarding the hen house.

These AAA rating agencies and investment brokerage firms are getting sweetheart deals. They get oodles of this stock before Joe Schmoe has access to it, so they have a [conflict of] *ahem* vested interest in hyping the stock as much as possible.

Facebook will never be a Google. Facebook isn't going anywhere, but it is the 3rd (albeit most successful) in a fairly long line of social networking sites. It is most valuable to governments and corporations, and less important to Joe Schmoe, whose data comprises the 'product' that facebook sells.

They'll eventually turn a profit, but the space they have to grow is very limited unless they quickly expand into a couple of different industries (which is probably what the IPO is about).

Cloud computing offering software as a service and microtransactions is the current big growth platform. All facebook currently offers is online storage space for your party photos and a webspace to tweet to your friends. Their messaging is mediocre, no one uses their mail and people get their news, facts, and online shopping/search experiences via other portals.

The one thing that facebook can do that no one else can is show you pictures of, or random details about <insert random stranger> that you've never met.

Compare that to the offerings of an Apple, Google, Microsoft, Amazon, etc. Facebook is about as useful as twitter, only with a lot more overhead.

So, yes... I imagine that some unlucky folks are going to take a bath in the near future.

 

[smoledman]

Facebook is the ultimate "emperor with no clothes". Zuckerberg is the luckiest MOFO in history.

 

[vrDrew]

I'm obviously far from the only person skeptical over Facebook's ability to justify its lofty IPO valuation.

Lets just say its possible, if everything works out just right, that FB could grow its earnings significantly in the next few years. I read one analyst who predicted about $4 billion in earnings in 2014. Maybe thats possible. Google makes $63 per US user annually, and its certainly possible FB could increase its per/user revenue accordingly.

I just don't have much confidence in the character, or the judgement, of the guy running the show. Its not just the 'hoodie. Its the "I'm the CEO, Bitch!" business card. Its the swinging the fencing foil in the office. I was twenty fours years old too - but even then I knew that sort of behavior was inappropriate in any sort of work environment. I certainly don't have much sympathy for the famed Winkelvoss twins - but by any reasonable standard, Zuckerberg ripped them off.

Mark Zuckerberg has had things go pretty much all his way, all his life. It seems a mathematical impossibility for him to be able to continue this streak indefinitely. When he does hit a roadblock or a setback, watch out.

The Steve Jobs who got kicked out of Apple in the 1980s deserved to be kicked out. He used his time in the wilderness to not only build a couple more great companies, but to mature as an executive and as a human being.

There is absolutely no mechanism to get Mark Zuckerberg out of Facebook. Thats the biggest worry any potential investor ought to have.

 

[malman89]

Too lazy to read much of this.

If you're lucky enough to get FB stock tomorrow, hold onto it for maybe 48 hours max.

I'd sell 50% once the price doubles (it will). I'd sell another 35% when it hits $100 (38*2 = 76, so another $24).

Then at that point I'd sell the remaining 10% at a level you didn't think it'd reach (like $150+) and then who cares about the other 5% at that point, so hold on to it for long term gain - or at best a wash if the price plummets.

Tech IPOs boom - and quick. See LinkedIn and Groupon. They both boomed in the first day. LinkedIn has proven to be a bit stable while Groupon has been a disaster. Even still, if you only held on to most/all of your Groupon stock for 24-48 hours, you would've made a pretty penny if you had enough stock.

 

[Reach9]

I think you made some valid points, which i agree with. I believe a lot of people agree as well, since Facebook's IPO ended up with just a $0.23 gain. Very disappointing.

But that wasn't the reason for the IPO.. the reason for the IPO was to make the Facebook insiders (founders, employees, investors, venture capitalists) even richer.

Apparently Facebook has been charged with a $15B lawsuit in regards to user privacy by a group of users in California. We'll see how that goes.

People should stop comparing Facebook to Google as there aren't many things the company can do to sustain a $100B+ valuation.

Zuckerberg went and bought instagram for $1B, without letting the board know until the deal was done.. that speaks largely about the type of maturity he has.
Also, Apple is apparently working on a competitor to Instagram via iCloud, so there goes the value of the acquisition.
For a company like Apple.. getting 30M users won't be a difficult task.

 

[Tinyluph]

The likelihood of Apple making a social product more successful than Instagram seems dubious at best.

 

[smoledman]

The likelihood of Apple making a social product more successful than Instagram seems dubious at best.

Every company has it's strengths and weaknesses.

 

[maflynn]

I think you made some valid points, which i agree with. I believe a lot of people agree as well, since Facebook's IPO ended up with just a $0.23 gain. Very disappointing.

While the stock experts have comment on the lack luster performance, its clear that the Facebook made a boatload of money with the IPO and wasn't that the point.

At this point, its traders looking to make money by buying/selling the stock. Personally the way they have themselves organized, with Zuckerberg having all the power and not needing to report back to the stock holders is a mistake. Unlike most other corporations Zuckerberg holds all control. They're the golden child of the internet now, but things can change rapidly. Just look at yahoo, myspace, friendster all were on wildly popular but quickly slipped. I'm not saying this will happen to Facebook, but its not a blue chip investment either

 

[rdowns]

Too lazy to read much of this.

If you're lucky enough to get FB stock tomorrow, hold onto it for maybe 48 hours max.

I'd sell 50% once the price doubles (it will). I'd sell another 35% when it hits $100 (38*2 = 76, so another $24).

Then at that point I'd sell the remaining 10% at a level you didn't think it'd reach (like $150+) and then who cares about the other 5% at that point, so hold on to it for long term gain - or at best a wash if the price plummets.

Tech IPOs boom - and quick. See LinkedIn and Groupon. They both boomed in the first day. LinkedIn has proven to be a bit stable while Groupon has been a disaster. Even still, if you only held on to most/all of your Groupon stock for 24-48 hours, you would've made a pretty penny if you had enough stock.

How'd that work out for you?

 

[malman89]

How'd that work out for you?

I didn't invest and never intended to do so. They were just my thoughts and they were fairly sound based on history of the past two largest tech IPOs - Groupon and LinkedIn.

However, there were warning signs leading up, such as GM pulling its $10M FB ad budget just before the IPO that should've given others notice.

 

[swingerofbirch]

I wouldn't invest in Facebook. As far as I can tell, they have one main service. And that service makes money by selling ads like billions of other web-sites; they just have more visitors than most. They are in a unique position in that they are harvesting personal data, and maybe something can come of that for financial gain besides ads.

But it seems like inertia is the only reason why some other company couldn't do exactly what Facebook does now and Facebook could become a wasteland. It seems like Facebook even makes it easy for other companies to try something like that. The apps make it very extensible. I just was taking a look at Microsoft's new social service (so.cl) for fun and the first thing it asks you is to log-in with your Facebook (or Windows Live) account. I don't know exactly how all that works, but it doesn't seem like Facebook is going for a walled garden approach. For example, is there anything preventing Google from creating an app that pulls users' Facebook info to add to Google+ accounts?

Facebook is useful for people, and like I said, it has inertia. It's become the default platform a lot of people use. But just because people don't choose something else doesn't mean Facebook isn't replaceable.

Plus, they don't seem to have plans beyond improving the one service they have now. So where is the growth? All that adds up to me not being impressed with it as an investment. But I'm sure there are people smarter than me who know more about all this.

 

[MorphingDragon]

Plus, they don't seem to have plans beyond improving the one service they have now. So where is the growth? All that adds up to me not being impressed with it as an investment. But I'm sure there are people smarter than me who know more about all this.

No you're not alone, I came to a similar conclusion.

I chose to put my money into RedHat and some New Zealand companies, growth is almost guaranteed. They are unique and they have CEOs who know how to play the game.

 

[maflynn]

I wouldn't invest in Facebook. As far as I can tell, they have one main service.

True but now with Billions of $$ in the bank they can branch out fairly easily. While I'll not disagree with you that they're a one hit wonder at the moment. We have no idea of what plans they have to create other revenue streams.

I believe they'll not wander to far out of the facebook realm in terms of new business opportunities but continue to leverage facebook in ways to generate $$

 

[tekno]

However, there were warning signs leading up, such as GM pulling its $10M FB ad budget just before the IPO that should've given others notice.

Maybe the warning signs are now showing:

http://www.bbc.co.uk/news/business-18141990

 

[Les Kern]

Maybe the warning signs are now showing:

http://www.bbc.co.uk/news/business-18141990

Too late for Average Joe to get in on this scam. In fact, they had a party, and you (meaning "we") weren't invited. The short-sellers were all set to go, the price was propped up on the first day just to keep it interesting, then in early trading it started.
Boom!
FB has a real value of about $1.00 a share. They make nothing, it's all an illusion.
Feel free to play, but playing it is.

 

[tekno]

Too late for Average Joe to get in on this scam. In fact, they had a party, and you (meaning "we") weren't invited. The short-sellers were all set to go, the price was propped up on the first day just to keep it interesting, then in early trading it started.
Boom!
FB has a real value of about $1.00 a share. They make nothing, it's all an illusion.
Feel free to play, but playing it is.

I deleted my FB page when I heard what they were making out of my status updates and photos. I look forward to it failing and the investors losing.

I also look forward to the day everyone learns that the internet is so transient that nothing is a dead cert nor worth the billions they think. I still believe internet advertising doesn't work as well as traditional means.

 

[MutinyMore]

EDIT, Removing my post..

 

[MovieCutter]

EDIT, Removing my post..

Good gods you've been here what...5 minutes?

 

[MutinyMore]

Good gods you've been here what...5 minutes?

Ha, sorry, but I accidentally threw a gem out there, and removed it.

A subtle one, but still.. at least I acknowledged it

 

[rocknblogger]

I deleted my FB page when I heard what they were making out of my status updates and photos. I look forward to it failing and the investors losing.

Why in God's name would it make you happy if people lost their money? And what difference could it possibly make to you to see Facebook fail? You sound like a miserable little person.

 

[Reach9]

Ouch.. down almost 9% today. Looks like there are more smarter investors around now than there were during the dotcom boom lol.

Social Networking will and has always be here, but in different forms. It was MySpace before, and now it's Facebook. Who knows if Facebook will be here in 5 years? But social networking isn't going anywhere, and it's beneficiary for people to embrace it.
Now.. are the companies worth billions? That's a different issue.

While the stock experts have comment on the lack luster performance, its clear that the Facebook made a boatload of money with the IPO and wasn't that the point.

For sure, the IPO served it's purpose.. pre-IPO Facebook insiders made money. But generally people have realized that this was just overhyped.

True but now with Billions of $$ in the bank they can branch out fairly easily. While I'll not disagree with you that they're a one hit wonder at the moment. We have no idea of what plans they have to create other revenue streams.

I believe they'll not wander to far out of the facebook realm in terms of new business opportunities but continue to leverage facebook in ways to generate $$

They said their top priority is mobile, which makes sense. However, even with billions, i don't see them monetizing from mobile properly yet. There's a clear line between having good ads and just adding annoyance to the end user, if that tips then people will just get fed up and stop using it. I don't think they can come up with anything that can come close to justifying their valuation.
Facebook recently changed it's News Feed on the mobile devices, and i absolutely hate it.

 

[rocketrace]

You guys are looking at this wrong. FB is a traders dream stock to short! I have been killing it 6 figures in profit from shorts alone. It's a decent long term 1-2 years once it bottoms out but there is more risk in holding it.

Came across this online and it was kind of interesting.