Facebook has filed to go public to sell shares in an Initial Public Offering (IPO, “stocks”), and all the world is abuzz about it. Imagine, stocks in the world’s biggest social networking site! But is it really a good investment?
That’s hard to say. After all, you have to remember buying stocks are about investing in a company’s future, not its past or present. Facebook is gigantic in the world today, sure. But you’re not buying stocks on how it got there, or its past growth. You’re buying stocks in its future. While it has grown tremendously in the past, you’re betting whether it can continue to do the same, or even grow, in buying stocks. That past means very little on the future of Facebook’s stocks because it’s how it does from here that matters. Sure, its tremendously successful past gives a lot of comfort it has what it takes to succeed. But might Facebook have come close enough to its peak that an investment in it is actually not wise?
The Globe & Mail had an excellent article on five issues facing Facebook, detailed by Facebook in Facebook’s regulatory document with the Securities and Exchange Commission to prepare it for an IPO in the spring. I’ve summarized them below in case the article gets filed.
- More mobile users so less revenue – more users are using Facebook on mobile devices that have no advertising. Facebook got 85% of its income in 2011 from advertising. That means less income from less use on desktops and laptops, and it isn’t easy to squeeze in ads on Facebook for mobile… not to mention turn off many users who would be annoyed by them given there is not much real estate on phone screens for ads.
- China big market that might not get accessed to limit growth – 450 million potential users await Facebook, compared to its 800 million users today. However, Chinese censorship and hack threats have kept Facebook’s desire to expand into China in check. There are also several major social networking sites there already. Big potential market, but far smaller likelihood of Facebook expanding there. No growth, little stock price increase, if any.
- No diversification of revenue sources so losses can be quick and big – outside of the 85% revenue from ads, that could fluctuate with the economy, 12% of the remaining 15% comes from Zynga, one games company. One bad move in the relationship means a lot of income may no longer be there for Facebook, and losses for stock holders.
- Some lucrative markets still exists, but not without their challenges – in countries such as Brazil, Germany and India, Facebook has an estimated penetration rate of 20-30%. In Japan, Russia and South Korea, the rate is less than 15%. There have not been challenges there like China, but other challenges nonetheless if Facebook hasn’t penetrated those free markets effectively. It’s not like they haven’t had a chance to try, so growth may be limited there. Again, no growth, no price increase. For reference, Facebook’s penetration rate in the U.S. hovers around 60%, and in some countries, such as Chile, it’s closer to 80%.
- Mark Zukerberg – Mark is young at just 27. He will still have ultimate control, but can the older board live with him, and can he still be the visionary for some years from now? How will he handle challenging times? Will he be mature enough to let go if that is what would be needed?
Knowing what I do about Facebook here, and that technology can change very quickly, I wouldn’t invest in Facebook stocks. Not that I don’t think it’d rise in the short run, but I don’t think it’d rise much, if any, in the long run. I’m even thinking it wouldn’t be worth investing for 2 years given Facebook has come this far without much setback. It’s due for one, currently flying high and all. I’m hoping I’m wrong for the good of Facebook and all their future investors, but I won’t be betting money on it.