Facebook IPO

A friend of mine has been watching the price of Facebook shares slide lower and lower since the IPO, and he asked me would I have bought into it if I had opportunity.

There are several critical things that I look for when assessing whether an IPO is worth the investment.

  • The fundamentals
  • the current revenue stream / business model
  • what the company plans to do with the capital raised

Fundamentals are important because I can make a reasonable calculation on what I believe the share price should be. When I found out that the PE ratio was close to 100 then that alone was enough for me to say No because that tells me that the share is way over priced for an IPO.

I only have a vague understanding of the current revenue stream / business model for Facebook, and that obviously requires more research on my part to determine if this would be a company that I would want to invest in. However from my limited exposure I understand that a majority of their revenue stream is advertising; a business model that doesn't inspire me (i.e. making money from on line advertisements instead of from your core business). One of the reasons that I don't like this model is that it treats people as products that you're attempting to monetize, and the history of geocities and myspace makes for some very compelling reading.

Recent announcements about GM pulling their advertising campaign from Facebook is another red flag. A recent article explains that 85% of the ad revenue that Facebook receives are from big companies like GM. If you lose a couple of big clients then Facebook will lose more of their revenue which in turn will affect the share price.

I don't know what Facebook plans to do with the capital raised. The sort of things that I look for are:

  • plans for sustainable expansion
  • transitioning innovation to market
  • mining exploration and implementation
  • project specific capital raising

Maybe someone could correct me but I just don't see Facebook doing any of those. IPO's I avoid are the ones that are primarily concerned with realizing a benefit to private shareholders or pay back debt / balance books in order to continue operations. In these cases the company is trying to raise capital for the wrong reasons.

In conclusion there are too many red flags with the Facebook IPO and therefore I would not have invested. I would hope that anyone reading this and comparing my principles to the Facebook IPO would agree. If you're a retail investor that has lost money from Facebook then I suggest learning the basics of financial analysis so that you can arrive at your own insights as I have done. Of course if you prefer hype, then you'll probably get the same outcome as the Facebook IPO; Zuckered.

Comments

Dear Brent,

I agree with your analysis, I would like to make one comment though if you allow me, did we learn lessons from dot com bubble burst from the 2000s ?? if yes, then why are people doing it again and curse technology companies for ripping them off...

By Namir Kasim (not verified)

Dear Namir,

Once you understand the psychology of reasoning (especially bad decisions), then you can understand why these things happen. You agreed with my analysis before, so lets see if any of the salient points resonates with you:

  • Overlook and ignore unexpected data or evidence
  • Believe they can control outcomes that they can't.
  • Persuaded by circular reasoning, false analogies, and other fallacious arguments..
  • Unconsciously distort judgments to "look good", "get ahead." or "feel better"
  • Attribute good decisions to skill, bad outcomes to others' failures or bad luck.

Of course with Facebook IPO if you allowed yourself to get sucked in by the hype then you looked for evidence to support it while choosing to ignore or distort any data that told you otherwise. Its just the way people are. You can curse technology companies for ripping you off (and maybe they did), or you can learn to be more reasoned in your judgements.

By Brent

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