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Reasons Not To Buy the Facebook IPO

Published: May 16, 2012 | 7:41 am
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It’s entirely possible to create a list of reasons why you and I should be trying to buy stock in the Facebook IPO. There might well be a price pop given the interest in the issue. The company looks as if it might well become part of the basic infrastructure of the modern world. It’s got near 1 billion users, revenues are growing fast, as I say, there’s quite a list.

There’s also a similar list that could be written with reasons not to buy into it. The company has decided to issue more shares: sure, that’s a sign of healthy interest in the issue but it does reduce scarcity value. They’ve quite substantially raised the issue price: again a sign of strong demand for the issue but also reducing the chances of that first day or week pop.

GM has pulled advertising on the site: sure, that’s just one company and who really thought people would be shopping for a car on a social site? But if they’re not buying cars perhaps they’re also not buying any other durables? And those durables do make up a goodly chunk of total advertising budgets. So where is the ad spend to come from to enable Facebook to meet revenue projections if such a large part of ad spend isn’t going to migrate there?

And there are numbers which don’t bode well for the platform as an advertising space too:

Click-through rates are much lower on Facebook than they are on the internet generally, or on Google, according to WordStream (which manages search ads on Google and thus has a conflict of interest):

Facebook: 0.051%
Google: 0.4%
Average: 0.1%

That’s without even mentioning that the company (as it is admitting in its roadshow) is having problems monetising the mobile traffic: which is a serious problem as traffic is moving to mobile in huge great waves.

So you can make the business case either way. I tend to be on the pessimistic side but then that’s just me. My feeling is that the company is being valued as if it has already grown in the way that say Google, Microsoft and Amazon did in the past. But it still has to do that growing and there’s no certainty that it will. But then it’s such differences of opinion that make markets.

The thing that really worries me though is who is trying to buy in and who isn’t. There are a lot of whispers around, rumours and no more than that really, that the big institutional investors are not all that keen. Some will obviously buy in, an IPO is a rare opportunity to create a large stake in a company that will be a major part of various indices. But listing to those whispers it seems that demand is really being driven by retail investors.

That’s something that has me reaching back to the end of the dotcom boom in the UK stock markets. When Last Minute floated at what proved to be an absurd over valuation driven entirely by retail demand and the hope for a pop in the price after flotation. No, I don’t insist that the same thing is happening with Facebook, I’m only advancing the possibility that it might be.

There is one tiny little detail that is making me wary as well. I’ve had a Facebook account for ages which I never use. The site just isn’t for me so I never log in. Haven’t for months at least. Yet just in these last few days the site has been sending me emails when anything happens there. It doesn’t normally do this. I just can’t get it out of my head that perhaps they’re trying to make sure that all those dormant accounts wake up and log in, even if just to see what the alert email is talking about, so that usage numbers go up nicely in the next set of quarterly figures.

The bottom line is that there’s absolutely nothing concrete at all that I can point to to explain why I’m not sure that Facebook is a good buy. Just a bit of handwaving and some general thoughts. The thing is though, I’ve lived and worked through two entire stock market bubbles and I am, I’m afraid, just uneasy.


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