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?
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?