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

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


 

About Chuck Bentley

CEO, Crown Mininstries
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16 Responses to Chuck Bentley: Why I Don’t “Like” the Facebook IPO

  1. Greg says:

    Very good piece of advice!

  2. Charles Osman says:

    Chuck, I think your assessment of FaceBook & its CEO are spot on. Just do a cursory check on him & you would be a fool to let him have any of your personal information or money.

  3. JJ Flack says:

    I agree with the analysis. (P.S. SALT Plan Question) In regards to the agressive savings, we have sold our home. Just using an example, let’s say we get a new mortgage and the difference between the 30yr/15yr is $400. Only in light of the SALT plan, would you say to take the 30yr to put the remaining $400 in savings or still do the 15yr?

  4. Deanna says:

    I agree completely.

  5. Mike says:

    I’ve made more than my fair share of mistakes in picking stocks for my 401K plan during the past years and am glad Social Security will be there to assist me when I turn 66 in 5 years. This is why I am against any Social Security plan where it becomes like a 401K plan. What happens to the person who’s done all that investing and picks lousy stocks? They end up homeless and destitute in old age?? Because there would be NO “old style” Social Security left as a safety net to assist them in such a new Social Security system that’s based on being like a 401K plan.

    That’s why I believe the Social Security system needs one simple tweak to make it more than solvent into the 22nd century, and that is simply take the ceiling off the FCIA tax so that folks earning more than $109,000 per year continue to have that FCIA tax taken out of their pay as is done for all us making less than $109,000 per year. You realize, someone like an Oprah or a Rush Limbaugh pay one FICA tax payment from their pay check in January as they make so much in one year they easily pass that $109,000 cut off in the first week of January. The rest of us get to pay the entire year. Seems like that should be changed. That simple change would end the discussion about how to make Social Security solvent until sometime in the 22nd century.

    Having said all that, I totally agree with Chuck’s analysis.

  6. Jo Turner says:

    I was wondering about the Facebook IPO Chuck, but, after reading your comments, I think I’ll pass (I wouldn’t have been able to invest much at all anyway). I think your comments are very good and valid. Actually, I was concerned about the same thing…what if some other company comes along and becomes more popular than FB, just like FB became more popular than MySpace?!

  7. Dianne says:

    Hi Chuck, I agree with you 100%. With the current economy crisis I would be weary to invest in an
    new IPO’s espeacially FB. Always believe in Gods word and follow his principles and you can never
    go wrong.

  8. John says:

    Mr. Chuck…….thank you for the information.

  9. Deanna says:

    Another thought – I watched this guy interviewed a couple of years ago and it was very scary. He bragged about the intimate knowledge he has about young girls and commented on how naive they are. That turned me off to FB right then and there.

  10. Tom Kohls says:

    I agree completely with the “herd mentality” advice regarding a lot of things in life–we need to seek the Biblical “narrow way” and leave the “Broadway” to others. Although I use Facebook to keep in contact with friends and family,I do not like it’s invasive technology and use as many of the privacy filters that I can find, check, or uncheck. And like MySpace, I think it will rise and fall on the whims of a very fickle public that is always looking for the newest thing.

    Just a technology note–the emails I receive from Crown have the accents (quotation marks, hyphens, apostrophes) garbled up with code. And please put a link in to Amazon or CBD for your book so people can click on it and order, or at least check it out!

  11. David Toussaint says:

    Chuck
    you make a great point about investing. I agree fully, and as a matter of fact after it has been out and settled I may short it. thanks for your great work. David Toussaint

  12. Dave says:

    I would agree. Facebook has no assets to speak of. No trucks, no equipment, only a few buildings, etc. It is a repeat of a .dot bomb stock from the 90s. I would also question Mark Zuckerberg’s abilities to lead or pick other top leaders to run a company moving forward. Sure, he made his billions and that is a nice story, but moving forward, the REVENUE that Facebook must generate will mostly come from advertising profits. My last point. Do you believe that they will keep information private? The entire revenue approach would be to target market the members of Facebook by outside companies that pay for that information. I highly doubt Facebook will be able to say no to that kind of pressure. Beware.

  13. Wayne Smith says:

    I think FB is not going to do well as a publicly-traded company because the objectives of the shareholders (growth of earnings through increased advertising revenue) are in contrast with the objectives of the user (improved functionality with little advertising). It is a classic Proverbs 22:7 situation: We, the borrowers (we use the site for free and owe FB) are indebted to the lenders (FB, who demands payment through viewing advertising). We are their slave and have to endure advertising and continually-changing privacy rules to use the site. At some point we will get tired of being in debt!

  14. Jude Sullivan says:

    Thanks for the insight. Already controversy surrounds how the IPO was handled. I am curious… you mention Z’s integrity (or lack thereof). While I would infer him to have been immature at times, I wouldn’t necessarily jump to the point of pegging one as lacking integrity based upon this. Your deeper thoughts???

  15. Pingback: Healthcare Collides with Religious Freedom | Inspiring Faithful Stewards

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