Friday, May 18, 2012

Facebook: To Buy or Not To Buy, That Is The Question

8 years ago, a few socially challenged kids sitting around a dorm room at Harvard came up with a social networking website.  2 years later, offered to buy it from them for $1 Billion dollars.  They turned the offer down.  Everybody thought these kids were crazy, especially their CEO Mark Zuckerberg, but the founders of Facebook truly believed they had something special and so they set their sights a little higher.  So far, it looks like they were right.  Last year alone, Facebook made over $3 Billion dollars in revenue.  Where did they get all this money from?  Simple: ads. Facebook has over 900 million users (which is 3 times the population of every man, woman and child in the United States) and so companies are willing to pay big dollars to get their hands on the access to so many potential customers.  Moreover, Facebook doesn't simply offer your average run of the mill internet ads.  That would be too easy.  What makes Facebook such an attractive offer to advertisers is the fact that Facebook has the personal information for nearly a trillion people.  What this means is that advertisers can specifically target a certain segment of the population with their ads.  Advertisers can also pay Facebook to see which demographics of people actually show interest in their products.  And all this time you thought YOU were using Facebook; little did you know it's actually the other way around.  But the biggest news coming out of Facebook these days is not the $3 Billion it made last year or the way it uses your personal info.  Rather, it's the (somewhat controversial) decision to take Facebook public on the stock market.  Zuckerberg and crew were certainly wise to turn down the offers from Yahoo and others in the past, but were they wise to make this Initial Public Offering (IPO)?  And, more importantly, should you buy their stock?

From the Wall Street Journal:

Facebook, its executives and early investors are selling up to 484.4 million shares, which will raise as much as $18.4 billion. The company's shares will begin trading on the Nasdaq Stock Market around 11 a.m. ET on Friday with the symbol FB.
At $38 a share, Facebook is valued at $104 billion, the biggest-ever valuation by an American company at the time of its offering.
Facebook's IPO is set to raise $18.4 billion, becoming the second-largest U.S. IPO of all time behind Visa Inc.'s 2008 offering that brought in $19.65 billion, according to Dealogic.
Facebook would be the 23rd largest U.S. company by stock market capitalization, ahead of firms like Inc. and Cisco Systems Inc., according to Capital IQ.

So hey, one thing's for sure - Facebook is going to make boatloads of money today.  Indeed, if all goes well Mark Zuckerberg's shares alone will increase his net worth -- which is already at $17.5 Billion -- to approximately $20 Billion dollars, which would put him among the 40 wealthiest people in the world.  And all at the ripe old age of 28.

But not all money is good money.

If you're a business owner and your business is doing fairly well, then you have no need to issue shares of your company to the public.  As long as your company is operating in the black then only you know the daily ups and downs that your business may experience from day to day.  But if you take that same company and put it on the stock market - all bets are off.  Once your company is publicly traded on the stock market, the world puts you under a microscope.  A minor speed bump that you may have easily dealt with before now finds its way onto the front page of every major publication around the globe.  And Lord forbid the entire market decides to have a bad day and your stock falls.  Then you're really screwed.  And lest we forget, once you decide to go public with your stock you are now under the ever-watchful eye of the federal government's Securities and Exchange Commission (SEC), among others. So the point is there's a lot for Facebook to worry about by going public, and most of it has nothing to do with the actual business of Facebook, which is supposed to be focussed on innovating new ways for people to interact socially on the web.

And with Facebook you have to remember that it's unique in that it doesn't actually produce a good like most companies.  Its value comes from us - the users. If we're happy, then advertisers are happy.  And if advertisers are happy then Facebook is happy.  However, once the focus shifts from pleasing the users to pleasing the shareholders, Facebook could find itself losing its legendary fan-base and that would not be a good look. 
I'll admit to you right now, I am not a stock broker and so I clearly am not qualified to give anybody professional advice on whether or not to buy stock in Facebook today.  But as somebody who keeps an eye on Wall Street, the overwhelming buzz that I'm hearing is that everybody expects Facebook's stock value to drop after today.  It will likely do well out of the gate because of all the hype and media build up, so there's an argument to be made for picking up a few shares so that you can turn a quick buck should the stock climb over the next few days.  But as far as long term investments, Facebook is probably not your best bet.  If you want long term, look into the commodity Gold.  We were tipped off a few years ago and wrote a post about how Gold is a wise long-term investment; 2 years later it looks like that advice still stands. As for Facebook, we're not so sure.

There is little doubt that the Facebook team has beaten all of the odds to get to where they are today.  And, in all likelihood, they'll probably continue to do so going forward.  They're innovative. They're smart.  And, best of all, they've managed to addict the world to their product.  But the stock market is a dangerous place that is affected by not only what companies do here in America but also by how the markets do in Europe (which is in trouble right now) and around the world.  Nobody is immune to a bear market.  Not even Facebook.

1. Should Facebook have gone public?  
2. Given that they made over $3Billion last year alone, why do you think Facebook went public?
3. How do you see it playing out?
4. Do you plan to buy Facebook stock?
5. Where do you think Facebook will be 5 years from now?

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