The hype has been building for months, reaching a fever pitch over the past few days. Facebook is finally going public and you and I have a chance to buy shares of Facebook stock! The question is, should we?
Personally, I’m saying no. Here’s why…
The first reason is for something I’ve already mentioned. The hype. IPO’s are extremely volatile to begin with. With a stock as hyped as Facebook the first few days of trading are going to be insane. The price of the stock won’t have much to do with reflecting the value of the company, but rather how eager people are to get their hands on it in the opening days. As I’ve said many times before, if I’m going to gamble I’ll do it at a casino.
Secondly, the valuation. Facebook is going to IPO for $38 per share. Which will initially value the company at over $100 billion, and that number is sure to skyrocket before investors like you and I will be able to get into the game. Facebook as $3.7 billion in revenue of which 85% comes from ad revenue. Ad revenue has also been declining for Facebook as large companies such as GM, are pulling their ads from the site due to lack of effectiveness.
Facebook also faces some major challenges. More and more users are only using Facebook through a mobile app. Currently, Facebook has no way to monetize this traffic. Not to mention how terrible their mobile app is for a supposed genius tech company. By Mark Zuckerberg’s own admission, the company is “just getting started” on its mobile app.
There is potential for explosive growth with Facebook. Nobody has the data or targeting that Facebook has. If they really wanted, I think they could trounce Google’s Adsense overnight and make more money for publishers because they can target ads better than anyone else could dream of. However it seems Zuckerberg and Co. have bigger dreams than just being an ad network. What they have in store is beyond my realm of knowledge, but one thing is certain. What Zuckerberg says will go. The IPO is structured so that he retains an enormous amount of power within the company. So rather than truly having to answer to shareholders and a board of directors, Facebook will still operate much like a private company (another reason to avoid investing?).
Possibly the number one reason I’m staying away from Facebook stock, is all the reports of how excited everyday investors are to have a chance to buy it. I read those stories and one quote from Warren Buffet starts screaming inside my head: “Be fearful when others are greedy, and be greedy when others are fearful.” I’m not the best investor in the world, but just about all of my biggest winning investments have come from acting opposite the “herd”.
Now I’m not saying that Facebook isn’t a great company, it is. But great companies don’t always make great investments. At the valuation everyday investors will be able to get their hands on Facebook shares, they’re like sheep being sent to slaughter by the institutional investors.
There may come a time down the road, when Facebook’s valuation and long-term goals become more clear, that I’ll change my tune. For the time being, however, I’ll gladly stay on the sidelines and throw some more money into my boring index funds.
Disclaimer: The above is obviously my opinion, do not make financial decisions based only on what you read here. Cause that would be really, really dumb and I don’t want you to blame me for anything! Always do as much research as possible before buying, or not buying any investment.