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Why I’m Not Buying FaceBook Stock

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FaceBook will soon launch their IPO and shares of the company will soon be available to the general public and institutional investors (the IPO is scheduled for Friday May 18th). But I don’t count myself as one of those who will be lining up at the opening bell to purchase stock in FaceBook. Why? Well, there are a lot of reasons, but perhaps Warren Buffet said it best:

“The idea that something coming out…that’s being offered with significant commissions, all kinds of publicity, the seller electing the time to sell, is going to be the best single investment that I can make in the world among thousands of choices is mathematically impossible,” said Buffett.

Buffett’s business partner Charlie Munger also added:

“I don’t invest in what I don’t understand. And I don’t want to understand Facebook.”

Well, it looks like shares of FaceBook won’t be added to Berkshire Hathaway any time soon, but should it be added to your portfolio?

FaceBook Stock Certificate

Are you buying FaceBook at the opening bell?

Should You Invest in FaceBook?

Deciding to invest in a company depends on many factors, and you should always do more than read a quote from a famous businessman and investor when making a decision to invest. So let’s look at a few other issues before making the decision. Most investors are interested in things such as valuation, earnings, growth potential, long term business plan, and other intangibles. You can find much of that information in the company’s S-1, which is filed with the SEC.

How Much is FaceBook Worth?

Right now, FaceBook hasn’t announced the exact price of their initialstock offering, though there is a range of $28 – $35 $34 to $38 per share (FaceBook has already raised the target price due to high demand). They are offering 337 million Class A shares, which puts the valuation at roughly $106 billion on the high end (based on 2.8 billion outstanding shares, which is the number if all employee stock options are exercised). That’s an extremely high valuation for a company that only earned $1 billion last year. (That makes the P/E ratio for FaceBook somewhere in the range of 100 t0 1, which means it will take 100 years of earnings at the current rate to pay off).

Will FaceBook Continue Growing? The only way Facebook can justify their P/E ratio of 100 is to continue growing at a massive rate. Google, for example, had an IPO price of $85, and  P/E ratio of 185 at their IPO date. The stock has since risen to the $600 range, given initial investors a nice return on their investment. Google’s current P/E ratio is in roughly 18 (on date of initial publication if this article, click the previous link to find the current P/E ratio and other stock info).

But FaceBook isn’t Google. It’s true that they are in similar markets and both are internet based. FaceBook also has an enormous user base, with over 900 million users. The only way for this to be a good initial investment is for FaceBook to continue growing at a breakneck pace. Without the continued growth, there is no way to justify a P/E ratio of 100. The question many investors are asking is whether or not FaceBook has saturated the market already and if they will continue to grow.

What is FaceBook’s Long Term Business Plan?

FaceBook currently makes the majority of their money from advertising, though they also make money through FaceBook Credits which are used for in game apps, and FaceBook also recently announced plans for a paid app system. FaceBook has also recently acquired several other internet companies, most namely the recent $1B acquisition of Instagram. Will they be able to turn those new businesses into revenue growth? It’s quite likely that FaceBook has other revenue streams in work.

How to Buy Shares of FaceBook

If you want to get in on the IPO, then you need to act quickly – there are rumors that the underwriters will stop taking orders for FaceBook stock Tuesday afternoon, in advance of the Friday launch. If you want to place an order, then you will need an account with Charles Schwab, TD Ameritrade, Fidelity, E*Trade, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, BC Capital Markets LLC, Wells Fargo Securities LLC, or one of the other brokerage firms helping to underwrite the IPO. (there are approximately 31 in all). Keep in mind that if you don’t make the initial offering, you should be able to buy shares starting the next business day.

Will I ever Own FaceBook Shares?

As I mentioned above, I don’t plan on buying FaceBook in their initial offering. Perhaps FaceBook will follow in the steps of Google and look like a bargain a few years from now, or it might follow the path of many other IPOs and drop shortly after the offer goes live. But one of the other reasons I’m not investing in FaceBook at the onset is that I rarely buy or trade individual stocks. I primarily invest in index funds and low cost mutual funds, and currently only own two individual stocks, both of which are fairly stable blue chips that I plan on holding for the long haul. That isn’t to say I will never own FaceBook. Even though I don’t plan on buying now, I’m sure that FaceBook will one day be included in one of the major indexes and find its way into  a variety of index and mutual funds, so at some point, I will probably indirectly own a few shares. As for now, my involvement with FaceBook will remain purely social. <<— get it? heh.

Do you plan on buying shares of FaceBook?


Published or updated May 15, 2012.
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{ 9 comments… read them below or add one }

1 Kurt @ Money Counselor

I won’t be investing in Facebook either. I don’t “like” its CEO/chief owner or its business model, and the hype around the IPO virtually guarantees an inflated value.

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2 Ryan Guina

Kurt, there is a lot of discussion that the limited stock issue and media attention are also inflating the IPO price. Here is a good story on that: Is the Press Pumping Facebook’s IPO?.

As I mentioned, I’m not buying anytime soon, but I wouldn’t be surprised if I end up indirectly owning some shares in some of the mutual funds or index funds that I already currently have.

Either way, it will be interesting to see how this pans out.

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3 John McNulty

In my opinion, the sustainability of the Facebook business model, has massive flaws. That’s just my opinion, provided for free. So we now know how much this might be worth. Speaking of worth— Facebook has so many initial investors already “in” at such extraordinary P/E multiples—-that the powers to be may need to bid this up via an extraordinary amount of hype—-just to be able to get “out” with anything remotely resembling a gain. Just one person’s free opinion again.

And the question of the day still remains; “Do the majority of Facebook paid ads actually have any significant modifying effect on consumer behavior?” Our company specializes in a next generation of “ROI-analytics” & we have our own research based thoughts on this–as do others such as the Ehrenberg-Bass Institute, which has raised some serious question about the overall ROI-effectiveness of Facebook’s failry intrusive ad business platform.

For parties intrigued by this debate, here’s a quick amateur research project for gaining at least some insight into the Facebook-ad-effectiveness debate. I’ve tried this numerous times, and always get the same answer. Here is the wacky methodology I use:
—Find a group of high school or college Facebook users. (Not very hard).
—Ask them to write down the last Facebook ad they can remember.
—Give them only 10 seconds to respond.

If you hear—-”I cannot remember any”—don’t be too surprised.

Am I the only one who maybe, just maybe— sees a Red Flag waving here?

John McNulty
Co-CEO & Chief Operating Officer

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4 Ryan Guina

Great points, John. I’ll play Devil’s Advocate for a moment (only because I like to play Devil’s Advocate, not because I’m defending FaceBook as a good investment)…

I believe many of the same arguments were made in regard to Google when they went public. “What the search engine? How can that earn billions of dollars?” Well, by itself the search engine did, and still does. And while Advertising remains the bulk of Google’s revenues, they have also branched out into new areas, many of which have been immensely profitable. The Android platform was also an enormous coup for them, even if they give it away free (it helps them expand their ecosystem and gain market share in other areas).

Why bring up Google? Because FaceBook has already started expanding into new areas and they will continue to do so – this IPO for example, will put around $5 billion into their coffers (which is a massive amount of money when they only earned $1 billion in profits last year). In addition, their credit rating also was recently expanded, giving them the ability to borrow more money, and at lower rates. Add to that their recent acquisitions of Instagram and several other online and mobile companies, rumors of them expanding into new areas (cell phones and tablets have been rumored), and their acquisition of the patents from the recent AOL/Microsoft deal, and you can see there are many undercurrents that can change things in a hurry.

I don’t know if any of this will lead to the massive growth that will be necessary to justify their P/E ratio, but there is a good possibility that FaceBook will be able to increase profits above and beyond their most recent year, and possibly continue growing in ways we haven’t yet imagined (which is exactly what Google did).

All that said – I’m not an expert in this space, nor do I care to be. I’m also not planning on investing directly into FaceBook (I barely even use it myself). But I always enjoy playing Devil’s Advocate and looking at things from another perspective – especially if it isn’t the side I initially supported.

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5 Lena @ Taxes and Stuff

Hi Ryan,

I WILL be buying FB stock. Not with the IPO, but likely shortly thereafter. I have had the best luck with IPOs of companies I understand. I don’t necessarily think FB management makes the best decisions, but I place a lot of weight on public sentiment and brand recognition, and there’s nothing much more addictive and widely used these days than Facebook. I invested in Google at $299 a share, and still have those shares. Soooo glad about that choice now!! (And many people advised me against it because they didn’t understand Google). Although I don’t feel as strongly about FB as I do Google as a company, I am comfortable enough with it in the short term (the next few years) to put some of my money there. :)

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6 Craig

As someone who is involved in social media day to day, I feel like I have a better understanding as FB as a platform and product than someone who just knows the name. It’s a great company, has a massive audience, and I don’t think the company will falter like a MySpace, etc. It’s here to stay. But is it here to stay as a viable profitable company? Maybe…maybe not. They had their first F8 Marketing Conference earlier this year announcing new ad options. These ad options are designed for big business, not the small guy the way Google SEM is. That’s because the truth is, Facebook ads directing to outside sites and converting to sales is horrible. They do not work, I wouldn’t recommend buying it. Where they make sense, is to help grow your Fan Page to build a community. This way it allows a company to have a centralized community on FB to grow, nurture, etc.

Facebook Ads as it is now is not growing, but they are constantly looking for new ways to make money with the big brands. I think they can grow, but it will not be online so much, but with Mobile. Facebook has notoriously been bad with mobile, which is why they bought Instagram for $1B. If they can grow, optimize, and establish mobile ads dominance, that’s where the profit growth will come from. I also have no idea if they are trying to enter the OS and mobile phone space, etc. I think they can grow, I think it’s a stock worth getting if you have extra funds. But be careful.

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7 Ryan Guina

Craig, I agree – FaceBook is here to stay. Whether or not they justify the P/E ratio of 100 is a different story. They have already raised the target IPO price due to a combination of the limited stock issue and hype surrounding the IPO. They could possibly raise it again in the next few days. There is certainly money to be made here – there is with all stocks (buy, sell, go short, go long, etc.). But it’s not something I’m going to jump into right now. I’ll stick with funds and blue chips for my personal investing, and leave the initial gambling to others.

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8 Nick

I’m with you – no way I’m buying any time soon. I’ve been staying away from single stocks for the most part anyhow, but if I ever do get in, I’m going to wait until the numbers make more sense. Maybe I’ll miss a few bucks, but it’s way too risky for me.

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9 Long

I don’t get Facebook either. I don’t think it adds value to anything, much like most of the other internet companies that have had IPO’s recently. Additionally, I think Facebook is going to be another passing fad. Eventually, someone else will come out with something better that users will flock to.

Most recently, Facebook has been blundering with keeping up to recent trends like mobile use. I’ll admit that I use Facebook daily, but using Facebook on a mobile platform is extremely buggy and frustrating.

I’ll end up owning Facebook partially through shares of mutual funds due to indexing, but I won’t be buying individual shares. I’m sure a lot of people are going to make a lot of money off of it though. So, I guess knowing that, is it a wise decision to pass?

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