Chuck Bentley: Why I Don’t “Like” the Facebook IPO

crownfinancialstewards on 5/15/12 4:00 PM


The buzz on Wall Street this week surrounds the long-anticipated initial public offering (IPO) of the wildly popular social media giant, Facebook. It’s being hyped as one of the biggest initial public offerings in history for an Internet company, and investors are lining up to own a share. I’m not one of them.

There are plenty of reasons not to “like” Facebook’s initial public offering—despite the hype that it’s the hottest investment opportunity going. One is the past performance of two other technology darlings—Groupon and Netflix.

When Groupon “went public” last November, its stock opened at $28 a share. I just checked the ticker—it’s now trading at around $14 a share. Ouch!

Last summer, Netflix was trading at nearly $300 a share, but for a variety of reasons, including a substantial price hike for its service, revenues have dropped and so has the price of Netflix stock—now trading at around $78.50 a share. By the way, the Bentley family stopped using this service shortly after we ran out of family friendly content to view.

If Groupon and Netflix weren’t reason enough to avoid the Facebook IPO, don’t forget the epic fall of MySpace, once a contender as the leading social hub on the web. Rupert Murdoch’s News Corp. purchased it for a whopping $580 million in 2004 and was happy to find a buyer for it last year at $35 million.

A closer look at the numbers reveals that Facebook will likely follow a similar pattern of over-subscription based upon opening day hype, only to be followed by a struggle to maintain original market valuation. According to Bloomberg, “the top end of the price range values the world’s most popular social network at $96 billion, or more than Standard & Poor’s 500 Index members including Walt Disney Co. and Visa Inc.”

Facebook intends to offer 337.4 million shares at a price of $28 to $35 on NASDAQ under the symbol, FB. Although advertising revenues are estimated to reach $6.1 billion in 2012, the valuation would price Facebook stock at 24 times revenue, compared to 5 times revenue for Google.

Further, the company is still led Mark Zuckerberg, who turned 28 yesterday. He’s the unquestioned genius who founded Facebook in 2004 from his Harvard dorm room and promptly dropped out of school to build the business. If the reports of Mr. Zuckerberg that I’ve read are at all accurate, I would be leery about placing confidence in his leadership. Far too many companies have met their demise not from a lack of strong business performance but from lack of integrity at the top.

Finally, I am not unfamiliar with Facebook’s services and use it both personally and professionally. Although its free service is nice, it’s hardly essential to our daily lives. Like all fast-growing technology companies, Facebook can always be knocked from the top of the heap by yet another new social media network that attracts a loyal following. There are always more geeky college freshmen with highly marketable ideas. New and disruptive technology can surface overnight, and there is little to keep users loyal to one over the other.

Crown does not offer specific investment advice, and I’m not saying buy or don’t buy or that Facebook would be a bad investment in the long run—just be careful not to get caught up in the hype.

My personal philosophy is to avoid the herd mentality. That was not always the case. I’ve made terrible investment decisions in the past based purely on greed and a get–rich-quick attitude. Today, I find God’s wisdom to be a much better investment guide, particularly Proverbs 21:5, “Steady plodding brings prosperity, hasty speculation brings poverty.”

Agree or disagree with my analysis? I'd love to read your comments.

Chuck Bentley



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