10 Reasons Not to Buy FB Before You Buy It Anyway

[josieposy]

online.wsj.com/article/SB10001424052702303879604577408724178786822.html?mod=e2tw


Here Are 10 Reasons Not to Buy Facebook Before You Buy It Anyway

By now, you've probably made your mind up about Facebook Inc.'s initial public offering.

You're buying it—at any price and by any means necessary. No one is going to convince you otherwise.

That's fine. Facebook has many positives going for it. It's hugely popular. It has done some good. It seems like a good place to work. Facebook is growing by leaps and bounds.

As an investment, Facebook isn't any worse than any other IPO from any other company. Heck, the social-networking company even earns money, a lot of money.

To use the worn-out expression, everything about Facebook seems "like"-able.

But before you place your order, it is my fiduciary duty to remind you all of the risks involved with this investment. None of the risks that follow will be news to you, but that doesn't mean you shouldn't consider them.

After all, you are about to put your hard-earned money into either the next Google Inc. or Pets.com or something in between.

(1) The Camaro. General Motors Co. GM +2.29% pulled $10 million in ads from Facebook this week. GM said the ads were "ineffective." That, of course, wouldn't normally be a big deal. Facebook had $3.7 billion in ad revenue last year.

But more companies may be inclined to follow GM. Nearly half of advertisers see the ad dollars spent on Facebook as "experimental." And Facebook's ad revenue for the first quarter was actually down 6% from the previous quarter.

(2) Your favorite movie. Facebook, like Google and every service provider on the Internet, appears to give you something for nothing.

In reality, these companies are in the dirty business of peddling your personal details to advertisers—or worse. Facebook knows more than just where you live and where you work. It knows what you like and what you don't.

The company has attempted to give users more control about how much of their information is made public, but Facebook is very cagey when it comes to saying how it will use that information.

There is a lot of potential risk here: misuse of data, public backlash and potential government action. It wouldn't be a big deal until investors realize that their personal information is Facebook's single-biggest selling point to its ad customers.

(3) Global population growth. At some point, Facebook is going to run out of people. The social network already has 901 million active monthly users. And sure, that number could double, even triple. There are seven billion people on the planet, and Mark Zuckerberg could buy all of them a computer just to get them on the site.

At some point, Facebook is going to meet resistance. And the hurdles could come sooner than later. Renren, RENN +7.02% the popular Chinese social network, could have 200 million users by yearend.

(4) Baseball cards. As we do more of what we used to do at our desks on our phones, Facebook's ads are being shut out. Its mobile applications are ad-free. They have to be.

With most smart-phone displays the size of baseball cards, there's hardly any room to see all those annoying updates from your friends. Facebook says the ads will come, but as the apps become less user-friendly, how long will it take for ad-free rivals to capitalize?

(5) Friendster, MySpace. Consider all the wonderful things being said about Facebook today, and I can assure you it was said about those two precursors to today's can't-miss social network.

(6) The hoodie. Mr. Zuckerberg is brilliant. He's a rock star. He's already been the protagonist of a major movie. He's also just one person with authoritarian rule over Facebook. He spent $1 billion on Instagram without consulting, well, anyone.

Forget what would happen to Facebook if something tragic happened to him. What if he simply makes a big mistake?

(7) No parents. Facebook, it has been said, is a two-headed company. One head is Mr. Zuckerberg, who builds the products for the users. Cheryl Sandberg, the chief operating officer, is the one responsible for making the money. She's also considered the company's unofficial grown-up, given that she is older than 40 and has worked somewhere other than the college bookstore, even if it was Google.

Together, they've built a nontraditional way of doing business. No meetings. Small teams. They have unconventional mottos: "Move fast, break things" is one, and "Done is better than perfect" is another. This could be a business revolution—or the start of a food fight in the corporate cafeteria.

(8) Boredom. No matter how people swear up and down that money won't change them or it's not about the money or the purpose of Facebook was never "to be a company," the truth is money does change people. It changes lives and makes it harder to stay creative, focused and hungry.

(9) Krispy Kreme. It's one thing to have a product that everyone loves. It's another thing to make money.

Investors care only about the latter. Ask Krispy Kreme's former chief executive, Scott Livengood, about how things went after the company reported its first loss as a public company in 2004. Mr. Livengood was out in less than a year, and he had been selling doughy cakes covered in sugar.

(10) The ceiling. We may already have hit it with Facebook's valuation.

Consider that Facebook's 88% growth rate last year was something the company acknowledged was "unsustainable." Or that 10% to 15% of revenue comes from Zynga ZNGA -3.97% and other game companies that use the Facebook platform. Or everything in this list: skeptical advertisers, a young management team about to become amazingly rich, a history of social-network flameouts, deep-pocketed competition and the privacy issue.

It should give an investor pause, right?

[IIOY]

There is definitely some skepticism out there. For example, my understanding is that Zynga has not been doing well lately on FB and is looking for another platform.

I've also been reading that the general consensus is that FB is priced too high. Then you have the scary sideshow stories, such as the guy featured in the WSJ who plans to bet his daughter's $25,000 college fund on FB.

The whole thing is pretty interesting, especially while sitting safely on the sidelines.

[EloiseWeenie]

I'll stick with google

[ussimperius]

If I was an investor I would wait for a year or so before I bought Facebook. It just doesn't seem like it's worth $100 billion dollars. I'm on facebook all. the. time. and I have yet to click on an ad.

But does anyone with more knowledge know what happens if it falls short of its expected IPO? I'm not sure what the consequences are (I know fuckall about investing.)

[IIOY]

Yes, the thinking right now is that a lot of the bigwigs are going to cash out early while the shares are hot to lock down their multi-millions.

[pescalita]

It's all the news here (also, what happens to the local economy and real estate markets when all that cash descends tomorrow), and the news is mostly that it's a really dumb investment. We may have googley (ha) eyes for tech stock aka monopoly money, but we also remember getting burned.

May 17, 2012 13:25:17 GMT -5 ussimperius said:

If I was an investor I would wait for a year or so before I bought Facebook. It just doesn't seem like it's worth $100 billion dollars. I'm on facebook all. the. time. and I have yet to click on an ad.

But does anyone with more knowledge know what happens if it falls short of its expected IPO? I'm not sure what the consequences are (I know fuckall about investing.)

I don't know if I qualify as having more knowledge, but an IPO is just selling the stock the first day, at whatever price you set. People will buy that, and FB will get that cash. It's what happens the next day that matters. If it was overpriced, it will fall, and those initial investors will lose their pants. It's good short term news for the company, because they will make a lot of cash in the IPO, more than they should have made. It's bad news long term because now everyone knows you're not valuable.

OTOH, it's not a good idea to undervalue your IPO, because you only get the cash the first day. If you price your stock at $50 and it trades the next day for $100, you get $50 the first day, and those investors get $100 the next, when you likely could have gotten $100 in cash the first day.

So, a lot of it is about FB and investors trading cash, but long term it's hard for a public company to succeed when its owners are losing $$.

[ussimperius]

May 17, 2012 13:40:17 GMT -5 pescalita said:

It's all the news here (also, what happens to the local economy and real estate markets when all that cash descends tomorrow), and the news is mostly that it's a really dumb investment. We may have googley (ha) eyes for tech stock aka monopoly money, but we also remember getting burned.

May 17, 2012 13:25:17 GMT -5 ussimperius said:

If I was an investor I would wait for a year or so before I bought Facebook. It just doesn't seem like it's worth $100 billion dollars. I'm on facebook all. the. time. and I have yet to click on an ad.

But does anyone with more knowledge know what happens if it falls short of its expected IPO? I'm not sure what the consequences are (I know fuckall about investing.)

I don't know if I qualify as having more knowledge, but an IPO is just selling the stock the first day, at whatever price you set. People will buy that, and FB will get that cash. It's what happens the next day that matters. If it was overpriced, it will fall, and those initial investors will lose their pants. It's good short term news for the company, because they will make a lot of cash in the IPO, more than they should have made. It's bad news long term because now everyone knows you're not valuable.

OTOH, it's not a good idea to undervalue your IPO, because you only get the cash the first day. If you price your stock at $50 and it trades the next day for $100, you get $50 the first day, and those investors get $100 the next, when you likely could have gotten $100 in cash the first day.

So, a lot of it is about FB and investors trading cash, but long term it's hard for a public company to succeed when its owners are losing $$.

Thanks this makes sense. I was thinking that they had to give the money back, or something equally silly.

[earlgreyhot]

There's probably money that can be made, but it will be a lucky few who plan it right. It may not be a bad investment, but it's definitely not going to be a Google. Or maybe it will, who knows. DH wants to buy, but I don't.

[pescalita]

May 17, 2012 13:40:01 GMT -5 IIOY said:

Yes, the thinking right now is that a lot of the bigwigs are going to cash out early while the shares are hot to lock down their multi-millions.

If I worked for a company that someday may have an IPO, and our 401K dude were to give advice, this is what he would have said:

It's really bad mojo to sell all your shares right away, esp the higher up the food chain you are. Zuckerberg sells 100% on day one? He must know this is the highest it will ever be! Run for the hills!!

OTOH, dude, you earned it, this doesn't happen for everyone. If you make a mil, what are you doing here the next day?

OTT(third) hand, if you're working for a company and they provide your income, and now 90% of your net worth is tied up in their stock, you're not very diversified.

So basically, sell some, but not all, and sell it gradually.

But people, being people, will sell it all now, and the stock will tank.

[IIOY]

$104B.

O.O