Facebook recently announced they are going public. Mark Zuckerberg plans on making approximately $40 Billion from the IPO. While I do think Facebook is a great company and amazing success story, you have to be a patsy to invest in them.The popular saying in poker is “if you don’t know who’s the patsy at your table, then it’s you”, applies to buying Facebook (FB) at this stage of the game. Take it from someone who worked for a start up during the dot bomb days. Commerce One (CMRC), or Commerce None as I aptly call them since they are out of business, was one of the biggest IPOs during the 90’s. I’m not saying Facebook is the same as Commerce One, but implying who are the ones making money by going public.
The ones making money off Facebook are the ones who had an early stake in the company. It’s the founders, early investors, employees, and underwriters who are minting money. They are cashing out of their investment, and who could blame them. The social media space is currently very hot with investors.
It’s been estimated Facebook will be worth $100 Billion at the time of their public offering. Is Facebook really worth 100 times, taking into account their last year revenue of $1 Billion? Let’s even double it and assume this year they grow 100%, and generate $2 Billion annually, or 50 P/E ratio. Is Facebook worth that amount?
As I’ve mentioned in a previous post, there are really only two factors when considering investing in a company. To recap:
- Is the stock cheaply priced?
- What’s the prospect of future growth for the company in the next five to ten years?
Facebook definitely fails with test #1, and its future growth is also questionable. Though I do think it will grow faster than the average S&P 500 company. I do not think it’s worth 100 times current annual earnings. Mind you, in the short term the stock could do very well. Mr. Market can stay irrational for a very long time. What I’m saying is the fundamentals aren’t there to support the price.
Henry Blodget of Business Insider (yes the same guy who stated Amazon was a $300/share stock in the 90’s), has a fair and balanced article on what the real valuation of Facebook should be.
Facebook revenue is primarily adverting based and relies on a very fickle audience. Anyone remember MySpace? Facebook is the AOL of this era. Facebook’s user base growth has been outstanding where it’s been reported over 600 million users. The problem is at that huge base it will likely not grow much more. Instead Facebook must focus increasing the revenue per user, which isn’t an easy feat.
So while I think Facebook is a great company, and personally use the service myself, you will not find me investing in it. That time has come and gone, and you should have been done via the secondary market a few years ago. Employees of Facebook were selling their shares on some of the private exchanges. It was a very “public” company when still being private. So if you invest in Facebook now, you’re the patsy. Facebook is a trade, not an investment at its IPO price. There are currently better tech companies with well established histories and at much cheaper valuations.
Readers: What do you think of Facebook as an investment? Do you think my assessment of Facebook is wrong?