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Should Facebook Users Invest In Facebook’s Stock?
Can Zuckerberg Make Facebook Users Into Facebook Investors?
Markets Buzz About Facebook Going Public!
So the investment world has been abuzz over the last several weeks, due to the recent revelation that the much anticipated Facebook IPO would soon be announced. Obviously Facebook has proven to be a social networking phenomenon like no other. The site reportedly has over 800 million users and will likely grow to over a 1 Billion in membership within the next several years. Indeed what seemingly started as a small project in Mark Zuckerberg’s Harvard dorm room has now morphed into one of the most popular and widely used (some sources indicate FB is the most visited site in the world, even beyond Google) websites in the world. The growth accomplished by Facebook has been amazing. The following graphics pretty much say it all.
Impressive Facebook Stats
The Pictures Show Allot of Promise!
As we can see the site has grown it’s active users by 100s of millions in the last 5 years (Adding Around 300 million just since the beginning of 2011). Perhaps even more impressive though is that Facebook has consistently managed to monopolize more of their users time. Time is valuable, of course, and the more of it that users are spending on Facebook the more valuable the users become to Facebook!
Growing Facebook And Growing Riches
With the growth in popularity of their social networking site, Facebook has also managed to grow the amount of money flowing through their operation. There have been a number of high profile investments announced at different points in the company’s trajectory. These included deals with computer giant Microsoft and PayPal co-founder Peter Thiel, among others. Facebook’s actual business activities have also started to generate more cash. Facebook’s revenue has grown from $777 million in 2009 to $3.7 billion this year. According to the IPO filing, they have also achieved profitability, with their bottom line now at $1 billion, up from $229 million in 2009! With the growing revenues, profits, and popularity, Facebook has already made numerous people very rich. Given that reports are indicating that the their IPO will be valued at around $5 billion, their will now be a direct path for company insiders and investors to cash in their Facebook shares for millions and even billions! Mark Zuckerberg himself has a 28% stake that is likely to be valued in the $20-$30 billion range. So yes Facebook has been a tremendous success story. The company’s short but explosive history has exemplified the entrepreneurial dream and some key players have gotten rich because of this fact. Now there is excitement building among those in the financial media who are talking allot about the prospect of individual investors being able to take part in Facebook’s wonderful success story as it enters the public markets. However this begs the question can Facebook continue to live up to the hype and expectations? Or can Facebook’s many users find a way to profit from the business success they have helped to build?
Can Facebook Users Become Successful Facebook Investors?
This question makes me think of the old investment quote that says “people should invest in what they know”. Following this logic would indicate that Facebook’s public shares present their many users with a wildly profitable investment opportunity. Of course, as with many things in life, it’s probably not that simple. As I have explained above, Facebook has certainly emerged as an influential force in the world of technology. It’s also true that they have a lot of potential to grow and expand their business in the future. The IPO itself will bring a lot of benefits to Facebook’s position. The company will be injected with around $5 billion of capital, giving them the resources to pursue numerous strategic initiatives in order to further their future growth and development. Expansion in foreign markets, and building the sites capabilities to generate new sources of revenue from areas like online payments, mobile advertising, and social gaming are all possible areas for the social networking powerhouse to invest in. Strategic acquisitions of other tech startups that would give Facebook access to new niche markets or valuable pieces of intellectual property, could also be on the table. So making money on investing in Facebook will be a sure thing right? Well not so fast.
Opportunity Comes With Risk!
Certainly Facebook may hold a lot of investment potential for those willing to take a leap. With that said investors should consider that there are also numerous risks that will be attached to the company’s newly public shares. Before putting any hard earned money in Facebook it will behoove traders and investors to take some things into consideration. One of the first red flags that should be jumping out at anyone considering the shares at this point is the high price tag that the company will begin trading at. Facebook will have a Market Cap of around $100 billion at the time of their IPO. To put this in perspective they are valued as high as McDonald’s and more than Boeing. This is in spite of the fact that McDonald’s and Boeing generate much more revenues and profits. McDonald’s had around $24 billion in revenues and Boeing had over $64 billion last year. In other words there is a lot of very high expectations priced into Facebook’s market valuation right now. Investors are certainly not going to be getting bargain prices if they put money in at this point. If the company fails to meet these expectations by showing strong growth in future profits and revenues the share price will get hammered. There are also other significant risks that investors need to think about. Many analysts question Facebook’s staying power. Their social network has attracted and continued to engage many users for some time now, but asking if Facebook could become the next MySpace is a legitimate question. After all there are many savvy competitors looking to steal market share in the social networking space. Google, Twitter, or maybe even some college student in their dorm room could potentially craft the next hot social network that knocks Facebook out of the leadership role and into being one of tech history’s many fads. Another risk and possibly one of the bigger ones is that Facebook will be unable to successfully build a business model that monetizes their large user base. Even if Facebook continues to rapidly grow their users, they still have to figure out how to turn those users into revenue and profits. Especially profits! The markets are not valuing Facebook at $100 billion because they are expecting them to lose money. This could prove to be challenging, due to the fact that perhaps the most valuable thing about Facebook’s many users is their information. The issue for Facebook will be in finding a way to monetize their users information without disturbing the company’s relationship with users. Part of Facebook’s appeal at this point is that users seem to trust the site enough to share all kinds of information with it. If Facebook ever breaches this trust, in any way, there would likely be adverse consequences for the company’s reputation and of course the shareholder’s investment dollars. So what call should those looking to invest make on Facebook.
My Opinion On The Opportunity In Facebook’s Stock
The first point I will hit on, is don’t invest money that you can’t afford to lose. In fact if its money you can’t afford to lose you shouldn’t have it in the stock market at all, much less Facebook. My second point, would be that anyone investing money should be taking the time to understand what an investment in Facebook will be like. As I have already noted above, Facebook does have potential, but there are also many very real risks. The share price will likely resemble a roller coaster for investors, due to the many uncertainties. Think about whether this volatility is something you are ready to have your money exposed too. Remember, scared money never seems to win! Most important, in my opinion, is for potential investors to realize that the odds are not in their favor when it comes to investing in or trading Facebook’s stock. One of my previous articles detailed a number of hard truths regarding personal finances. As there are now many media pundits and market analysts out hyping Facebook’s public offering (as a great new opportunity), it is important to look past all of the opinions and hype to search for the truth. The hard truth about Facebook’s offering is that its not about providing a new opportunity for the average joe retail investor. It is all about facilitating a way for company insiders and hedge fund investors to cash in their tremendous gains (that are only on paper right now). This graphic shows just what I mean.
Allot Of "Insiders" Are Ready To Cash In!
A Number of People Will Make Money Off Of Facebook, Will You Be One Of Them?
It is also an avenue for Wall Street bankers to make another killing in 2012 as well as being an opportunity for the giddy financial media to profit from having an event to hype up and promote. If the average guy makes an extra buck as well, then so be it, but just remember, thats not the main reason Facebook is going public.
To Buy or Not To Buy?
Facebook has obvious potential and the shares could vary well start off hot when they begin trading, but I would still caution buyer beware. They are expensive from my view and come with lots of risk attached.
My Overall View On How To Approach Facebook’s Stock
The above points don’t mean that Facebook has no chance of ever making money for investors now that they are going public, but they are simple facts that individual investors should be looking at before committing their own hard earned capital. Me personally, I plan to stay away from Facebook at this point. I don’t think the potential rewards justify the heavy risks. That’s my opinion though. For those who want to take the risk right when Facebook goes public, I would recommend having a plan to manage the downside risk. Pick a point (preferably 10% or less) were you will cut your losses. The main goal should be not to lose money. Remember too, you can always get back in at what would be a better and more attractive price if it tanks. Also continue to learn everything you can about Facebook’s still developing business model. If you are interested in investing, you should stay interested in learning about what your committing money to. Don’t just passively buy and hope for returns, but buy and continue monitoring how Facebook will achieve those returns on your behalf. To conclude do allot of homework before making any decision and be careful to separate the hard facts from the hype.
Disclaimer: I am not a financial advisor and this is not a solicitation to buy or sell anything. I do not plan on investing in Facebook or any other companies mentioned in the article, but may change my mind. This article is just an opinion piece and I am not registered as an advisor with the SEC. You should always do your own research before making any investments.