Facebook Stock: To Buy or Not to Buy

The most anticipated day in information technology history (arguably) is upon us: the Facebook IPO. Expected to be priced in the $34 - $38 per share range, you can own a piece of the company tomorrow. Well, technically you could own a piece; whether you can actually get your hands on shares is another story.

But do you want to own Facebook as a stock in your portfolio? Will you get rich from a “buy and sell” mentality? Is Facebook a “long term hold” valuation play? This, in my opinion, is the $100,000,000,000 question.

Let's address some of the facts:

 


If you read what the “experts” have to say about the stock, you'll find mixed results. Some say that Facebook is the next Microsoft, Google, Apple or Amazon. Others say it's the next AOL, Pets.com or Webvan.com. Is Zuckerberg the next Steve Jobs (founded Apple in 1976), Jeff Bezos (founded Amazon in 1994) or Bill Gates (founded Microsoft in 1975)? Only time will tell. Remember that Facebook has been around about as long (8 years) as it will take you to read this article.

User Base
And let's not forget how wildly popular Facebook is. They have about 1,000,000,000 users. And they aren't even in China yet (think there is reason Zuckerberg is learning Mandarin Chinese??). More than 50% of their users are active EVERY day. Everyone is on Facebook, even your grandmother (although not all grandmothers are friends with their grandchildren on Facebook…just ask Prince Harry).

The Bubble
So, with all of that said, are you ready to plop down your hard earned money? Are you going to be part of the bubble or the boom? Tech stocks are historically a risky play. Many rise quickly, only to trend downward after the initial rush (see Groupon and Pandora). Many large institutions are typically the beneficiary of the lower price of a stock at the time of an IPO; by the time you can buy, you're paying more after they've made their millions.

Financial Expectations
When a company becomes publically traded, there are now stockholder expectations that must be met, and more often, exceeded for your investment to pay off. Zuckerberg has stated: “Simply put: we don't build services to make money; we make money to build better services.” Is this the mentality you want if you are trying to make money?? Facebook's 2011 revenue was just shy of $4B. The biggest question people have about Facebook is their mobile monetization strategy. They don't have ads on their mobile platform. They make money from ads. Mobile use is skyrocketing and will only increase. They haven't revealed a plan to combat this.

Risk vs. Reward
If they are truly valued at $100,000,000,000, then they have a price to earnings ratio of 100. That's high, maybe even really high (Google had a P/E in the 100s at the time of their IPO). Right now, it seems risky. It seems as if they “have to” go public. Everyone expects it. Everyone wants it to happen. Zuckerberg seems to be the “boy wonder” who can do no wrong. But is the investment justified? Can it work? Can Facebook outperform the Street? Have you read about the Facebook employees, early investors, institutions and insiders that are selling their shares? Are they just simply cashing out, or is this a sign they know what is about to happen?

Conclusions
If you want to tell your grandchildren about Facebook's IPO, then buy it. And don't look back. And don't complain. If you want to sit on the sidelines for a few years and see how they progress, then wait it out. But don't complain if they shoot to the top of the list of must-have blue chip stocks. Don't complain if you have to pay $500 per share in a few years.

Facebook will be playing catch-up to the likes of Google and their online ads. Facebook is betting on the fact that they can convince users to click on their ads. And they don't have a strong analytics program (like Google) that will help their advertisers calculate real ROI and engagement.

If we all had crystal balls, there would be no reason to write this article. If we could see the future, there would never be a bubble.

“You've got to ask yourself one question: Do I feel lucky? Well, do ya?”
-Dirty Harry


By Dorothy Price

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