Tuesday, April 10, 2012

I Will Not Buy Facebook Stock, and Here's Why.

Based on what I have been reading, many people are freaking out (!) about the upcoming public offering of Facebook stock, like it's going to be the one true investment that will bring riches to everyone and put us all on easy street for the rest of our lives.

I don't think this will happen.

Now, I'm not an expert by any measure, but I do have a few "investments" in mutual funds and individual stocks. Some investments have gone up in value, and others have gone down. Back in the mid-1990s, I did not buy any Amazon.com stock, although if I had, it would have been a great investment with a wild rate of return.

People seem to always be looking for the next big get-rich-quick stock to buy. In the last several years, Facebook has become a household name, with millions of people across the world using it regularly to check up on their friends and to share their lives with others.

To me, it seems that this indicates that Facebook has already gone through its rapid growth period. The Facebook market is saturated. Most people who access the internet have heard of it, and have gotten Facebook accounts if they want them. Indeed, many people have multiple Facebook accounts.

Facebook has done this while remaining a privately held company. It makes money on advertisements themed to what members post about and like.

As a public company, Facebook won't be an exclusive company controlled by a few high ranking people. It will be run by a board of directors and be answerable to all shareholders, shareholders who expect to see continued growth of an extreme magnitude. Growth = advertising revenue = shareholder value.

Well, the way I see it, since Facebook has already grown to be so large and involved in many aspects of our lives, when it goes public, the share price will already reflect this value. The only way to gain more value is to continue its exponential growth.

This brings me to my next concern, based mostly on my own personal experience.

Three years ago, my high school used Facebook to organize much of my graduating classes reunion. This was the time when, if Facebook was a public company, I should have bought some shares. It seemed that all of my friends, both local and as I could see across the country (since my graduating class had spread from New York to Virginia, California, North Carolina, and Egypt), were signing up with new accounts to get information about old friends. All these new accounts were new eyeballs to see advertising to generate more revenue for the Facebook company.

I saw this high school reunion effect happen with many of my local friends as well. I can only conclude that similar things happened across the country. That would have been a great time to buy, but we couldn't buy Facebook stock at the time since it was still privately held.

Now, three years later, the Facebook market seems saturated. Lots of high school classes have used it to organize reunions. It seems everyone who wants an account has one. Not much new growth seems apparent, or very possible.

But what about the new generation of upcoming teenagers? Won't they want to Facebook, too?

Sure they will! But many of the past generation of teenagers used MySpace. MySpace yielded to Facebook, and to a certain degree Twitter. It's fairly certain that someday there will be a great replacement to Facebook, something that hasn't been thought of yet, that will easily incorporate your Facebook profile in as much detail as you want (Google +, perhaps, but likely something newer). I may be wrong in this aspect, as Amazon.com still reigns supreme in online retail.

(As an aside, Amazon.com actually sells tangible items to make money. Facebook relies on advertising revenue based on eyeballs looking at the screen)

But as many people sign up for Facebook accounts in the future, the number of stale, inactive accounts will also grow. We used Facebook to plan events and catch up with friends, and now that it's passed, the need to check in on Facebook is lessened, so we'll cut back on how often we check it, and realize that life didn't end when we weren't online, and many older accounts will just slowly become less and less active. The high numbers of Facebook accounts will remain, but that will be balanced by a related number of inactive or forgotten accounts.

And a final point about Facebook becoming a public company that concerns me is the refreshes that Facebook does every now and then.

Remember how angry everyone got when the Timeline was introduced? People got in an uproar!

Now think about what will happen to the Facebook stock price when it introduces something new that is instantly ridiculed by the masses who hate it. Management won't be able to say "be patient, you'll learn to love it" any more. Shareholders will see the stock price go down and get antsy and complain with loud voices. That will likely not be pretty. The company won't be able to sit back and say "be patient, you'll grow to like it." Management will need to scramble and fix it quickly in order to satisfy the unrealistic demands of shareholders.

I'm having a hard time thinking of a good reason to buy Facebook stock. Maybe it'll go up and up for the first couple days or weeks due to the newness and related enthusiasm, but over the longer run, I don't see much value in it.

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