At first glance, one may wonder whether buying stock from a Harvard dropout is a sound investment. To be fair, said drop out, Mark Zuckerberg, is valued on paper at $28.4 billion. The social network’s bid to raise $5 billion in a public offering, would bring his company’s projected earning to between $75 billion to $100 billion, making it one of the largest IPO’s in history, trumping the initial offerings of both Google and Amazon. As the hype and concern continue to swirl around the IPO, analysts are beginning to wonder, perhaps too late, whether Facebook is actually worth the price, or rather, if the smoke and mirrors diverted their attention from the start of a new tech bubble that will undoubtedly burst.
IPOs are a way to get an initial infusion of cash for a company to pay their employees who came in on the ground floor, to make good on the years of low wages and hard work. Currently, the “start up,” which in this case is played by Facebook, spends four of every five dollars it is paid, to employ some of the best and brightest in the industry. The SEC filing that Facebook’s revenue’s generated to $4.38 per user in 2011, compared to Amazon’s $189 user, Ebay’s $39 user, and Google, which is also in the business of producing free services in return for advertising revenue, user’s value is estimated at $24. Therefore, the IPO will give the cash on hand need to pay for infrastructure, acquisitions, and other expenses, without yielding equal or greater profits. In essence, once the company launches the IPO, it see profits only equal to the valuation of the IPO. Not necessarily a good investment, if you ask me. The return of investment is then based not on the performance of the company, but on the performance of the stock.
When the dust settles, even the most aggressive investor would agree that an investment in Facebook would not just be a risky one, but in all respective cases, a stupid one. Investing in a product based purely on projection, without any real numbers for revenue, spending, growth, would be a fool-hardy purchase, to put it lightly. Buyer’s remorse would hit any investor two-fold when they realized, at second glance, that their revenue is not really accounted for? Facebook’s revenue comes 85% from advertisements, a limited medium, which has probably come close to its saturation point already on the site.
As Facebook noted in its IPO filing, where it is required to cite risk factors of the company by law, questions regarding privacy have caused a perpetual balancing act for the company, trying to keep the trust of the users while attempting to appease the advertisers.
“Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. Many of these laws and regulations are subject to change.”
The Achilles heel of the tech giant, Jeff Chester, of Digital Democracy told NPR, that Facebook has to “walk a very difficult digital tightrope,” where it’s business model is based upon selling user data to advertisers “large and small."
In order to grow, they must continue to get their users to feel comfortable sharing more and more information, while finding new ways to sell data to advertisers. Turns out that would be a flawed business model for any prospective business investor, don’t you think?
Sure, we all have a Facebook. Or at least 1 in 13 of us do. Since its founding seven years ago, Facebook has been able to generate 845 million monthly active users, and is available is over 70 languages. The question is not whether everyone loves it, but rather, if another tech bubble were about to burst, whether this relatively young tech company could ride out the storm.
As Richard Harris, Chief Executive at Port Shelter Investment Management, told CNBC, the hype surrounding the social network born out of a Harvard dorm room85, may be greater than its actual ticket price, citing “no real products” as a reason for the risks against investment.
“It reminds me of the huge dotcom bubble and this does seem to be harking back to the days of craziness where valuations are really high,” said Harris “But Facebook is a darling; everybody loves it, all the kids are on it and that’s one of the reasons we’re looking at valuations like this.”
Two values that distinguish Facebook from the passing fads that typified the dotcom bubble are the projected value, which is expected to be valued north of $75 billion, and the fact that a large chunk of its value has already been realized, thanks to an eager pool of global investors ready to ride the gravy train all the way to silicon valley.
As Facebook releases its IPO to raise $5 billion with a humongous stock offering, thousands of company employees will likely become millionaires within months. While Facebook has dramatically changed the way in which we interact, connect, and communicate in realm of social media, it does not necessarily translate into a sound investment by any means. Though Facebook has grown like a weed since its founding, the risks that face the firm grossly outweigh the gains, rendering each stock option more of a gamble than an investment. After the IPO filing, Facebook’s business spells nothing but trouble, leaving only one conclusion: the juice is most definitely not worth the squeeze.
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