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A Serious Faceplant for the Social Network

Investors hoping for a quick profit didn't understand the rules

   

Facebook185 A Serious Faceplant for the Social NetworkFacebook (NASDAQ:FB) might have been the most overhyped IPO in history.

Facebook was taken public at a valuation of over $100 billion. At the $38 issue price, Facebook shares traded at 104 times earnings. Apple (NASDAQ:AAPL), the world’s largest and arguably most successful technology company, trades at only 14 times earnings (closer to 10 times if you back out the net cash on Apple’s balance sheet).

The Wall Street promoters tasked with peddling Facebook’s shares successfully convinced investors that a company founded only eight years ago and run by 28-year-old CEO Mark Zuckerberg was a better bet — by a factor of 10 — than Apple.

Greed enabled Wall Street to once again dupe the investing public to line its own pockets. Facebook IPO investors were led to believe that a young Internet company run by the hoodie-wearing bathroom bandit (Zuckerberg hid in the bathroom at a New York investor presentation) could consistently generate the astronomical earnings growth needed to justify Facebook’s lofty valuation. Almost as soon as the shares started trading, the market decided otherwise.

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Even if Facebook were under the leadership of a more seasoned executive, the company wouldn’t be worthy of your investment. Facebook is speculative. It is a business with almost no barriers to entry. How long will it be until another 20-something college dropout comes up with a better mousetrap?

It should be telling that only months prior to Facebook’s IPO, Zuckerberg paid $1 billion for Instagram, an 18-month-old start-up that was founded by two Stanford grads. Instagram has no revenue and only 11 employees. The company’s only product is a basic social networking application built around photo sharing. Facebook engineers could have created a similar product over a long weekend. So why did Zuckerberg pay $1 billion for the company? Likely because Instagram, which already has 30+ million users, threatened Facebook’s dominance in social networking.

Low barriers to entry aren’t Facebook’s only problem though. Facebook may be suffering from boredom among users. When is the last time you logged into your Facebook account?  I’ve decided to deactivate my richardcyoung.com Facebook account because of privacy concerns as well as a total lack of interest. I advise you to consider the same.

A recent New York Times article, Like It or Not, His Face Is on Ad, highlights some serious privacy issues with Facebook. By example, did you know that if you “like” President Obama’s website (solely to stay informed of what the President is up to), Facebook can use that information to create what is called a sponsored ad of you endorsing the President? In fact, anything you “like” can be turned into a sponsored ad. Sounds unreasonably invasive to me.

Waning interest in Facebook may also explain the timing of the IPO.  I eschew IPOs, and I advise the same strategy for you. IPOs are often a raw deal for all but the well-connected. You have to ask yourself why the folks who know the most about their business have decided that now is the time to go public.

If there is not a well-justified reason for a company to raise equity capital, the founders may be looking to cash-in while public sentiment is still positive. The Facebook IPO appears to be just such a situation. Facebook didn’t need to go public to raise capital. It had no problem raising money in the private market. It appears as though the IPO was merely a ruse to provide top-of-the-market liquidity to Facebook’s early investors. Naturally, America’s favorite bank, the self-proclaimed Muppet-master, Goldman Sachs (NYSE:GS), is among Facebook’s early investors.

Unfortunately, the patsy in this con job was once again the unsuspecting investing public. Based on SecondMarket trading (an exchange for private companies), Facebook’s share price momentum peaked over a year ago. IPO investors looking to make a quick buck on Facebook instead lost 30% or more.

Stay far away from Facebook and avoid all other “hot” IPOs.


Article printed from InvestorPlace Media, http://investorplace.com/2012/06/face-plant-for-the-social-network-fb-aapl-gs/.

©2014 InvestorPlace Media, LLC

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