Facebook is simply this. A free sign up, free usage, social networking and online gaming site. Some people would like to call it a technology company. Yet, its money isn’t made from technology. The vast majority of their money is made through selling ad space on their popular platform. Big companies pay millions of dollars on the “HOPE,” “PRAYER,” and “OPPORTUNITY” that one of Facebook’s 900 million users world wide will click on their ad, come to their site and purchase a product. I’ve been using the internet for about 20 years and I think I may have bought 1 thing through clicking on an ad from a website.
When Facebook announced it’s IPO back in January, people were screaming that hey, it’s the next Google. I too, who missed on the Google IPO and the Apple turnaround when the stock was trading at $2 didn’t want to miss on the next potentially monstrous stock market success of Facebook. That’s what Facebook could have been and was thought to be. A behemoth making billions of dollars in revenue, and billions of dollars in net income and growing in excess of 5% year after year. What’s not to like about that? Blinded by the hopes for riches I said nothing, and guaranteed myself that I’d buy at least 10 shares at the expected price of $45 dollars. Now Zuckerberg’s being sued for supposedly dumping shares.
So what went wrong on May 18, 2012 when the stock debuted at $38 and rocketed up to $45 when the market finally opened. Well aside from the complete screw up of the NASDAQ system, I say a whopping nothing! The fact is, insiders always have a leg up on the investment community because they’re called insiders for a reason. They’re already privy to more information than the average retail investor. Sure, Facebook’s underwriters bought shares to keep the price where they wanted it, but large corporations or people with big pockets do this daily on the stock market. It’s called pump and dump. They drop in $250M and watch the volume increase and then you buy on speculation…and then they sell, laughing at you all the way to the bank. And that’s what everyone else did. They bought on speculation thinking that Facebook was going to be the next Google. Yeah, the company that opened at $85 and has since shot up to over $700 per share and is currently sitting at about $576 a share. Even if you weren’t an insider and Facebook’s stock chart looked anything remotely close to Google’s, you’d have made a nice penny.
Then wherein does the major difference lie that makes Google a better investment than Facebook at the time of the Facebook IPO? Well remember I said Facebook announced it’s IPO in January? Yes. Ok, so they didn’t go public until about 6 months later. Thus, you can imagine with all the hype building there were some other reports that had quite a few naysayers. Here are a few things that stuck out and made me realize that Facebook wasn’t anything close to Google. These are the reasons I decided to increase my position in a dividend paying utility company vs the long shot on the Facebook IPO.
1. Both Google and Facebook makes billions from advertising. But Google’s AdSense ad business is more profitable at the moment. So much so that even you could make money on your website running AdSense ads. Yes Google will cut you a check, how big is dependent on your website’s traffic and click through rate.
2. Google has products and Facebook does not. If you have a smartphone that’s not an iPhone or a Blackberry, then you’re probably running some version of the Android smartphone software. Yup, that’s made by Google. Google actually has its own phones too that run Android. Then there’s the Google marketplace for all Android smartphones on all the major service providers. Are you seeing this picture clearer?
3. People don’t use Facebook to find out useful information like where to get the best deal on a vacuum cleaner, they Google it. Yeah, the company’s name is now an adjective for “using an internet search engine to get useful information to help you in school, develop your business plan, and find out how.” Us dinosaurs use to use YAHOO!
4. Facebook’s biggest need is the ability to monetize mobile usage. Up until this point they have not. Which means, they’re leaving billions of dollars on the table. There have been dozens of reports floating around the investment and technology community saying that mobile is going to dominate PCs, and do to it what the DVD did to the VCR. In my mind I don’t think so, but hell, who knows. Facebook still doesn’t know how to turn a profit on it and sees it as their biggest need.
5. And perhaps the most glaring is Mark Zuckerberg’s impulse purchase for $1 billion dollars of Instagram. A company that had no revenue at the time, because like Facebook, it is a free platform for people to post pictures and talk. But unlike Facebook, it has no ad business. Zuckerberg made this decision without consulting his shareholders. He did? Yes, because he still has a majority stake in the company so no one can really vote him down on anything.
And to end this painstakingly intelligent article I’ll say this about investing. Insiders will always get rich on IPO’s if they sell because they usually have millions of these little pieces of paper called shares that have no actual value except what people “THINK” they are worth. It’s imagined. On May 18, 2012 Facebook was worth $100 billion because somebody said it was, and then somebody thought it was. It was most certainly not worth $100 billion on paper i.e. financial reports. And since the company was private up until May 18 and didn’t have to file public reports, you weren’t privy to the information insiders would have been privy to. Even the most oblivious insider with just 1 million shares was going to walk away with about $30-$50 million dollars if he sold his stake on IPO day. And the fact that as IPO day approached, some of the biggest insiders i.e. billion dollar companies kept increasing the number of shares they were going to offer to the market. Ding, ding, ding, because they knew the valuation was overinflated. The tried and true tested way to make intelligent investments is to study the companies you want to invest in and make informed decision based on solid financial information and buy at a fair price. So don’t blame Zuckerberg because he did what any other insider would do and sold off some shares. Maybe he had more information than you, but how many times has the stock market tanked since you’ve been born. Exactly. If you were suckered into this ad company that has no other business for even $38 dollars per share, then you’re looking at about a $12 dollar loss since Facebook is trading at $27.40 as we speak.
Be smart…don’t invest on hype and most certainly don’t blame Zuckerberg.
Until next write…
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