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Buy Facebook? Yeah, right!

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by Peter Switzer

Who would have imagined that a pain-in-the-neck nerd who decided it was a good idea to invade the privacy of others would end up with a business that’s expected to list with a value of US$100 billion?

I guess if you look at the success stories of companies such as Google, Apple and other internet offsprings from Silicon Valley, you’re really talking about the history of IT nerds who become incalculably rich.

The big question

So, the big question is, should you care enough to want to buy a share or two in this company? While the majority of analysts are giving the stock the thumbs up, my expert company measurer, Roger Montgomery, on my SWITZER program on Sky Business Channel says it’s not a good buy. He fears the potential for dilution of the stock as more stock will be issued to pursue growth. Meanwhile, RBS Morgans broker Simon Bond from RBS Morgans, who is a geek-lover of stocks like Apple, thinks Facebook will eventually face a society backlash for the damage it does. They both pointed to the lawsuits that could be a risk management issue.

(Bond has a blog on this website outlining his views.)

Google comparison

Also, legendary finance guru Jim Rogers thinks the stock will be overpriced but let’s have a look at the history of Google and its share price gyrations.

On February 2, one Google share was selling for US$585.11. Its best price recently was around US$668.28 and this is a long way from its closing price upon listing on August 19, 2004, which was US$100.34. These companies have a way of making a monkey out of experts on companies.

The numbers

The big challenge for Facebook will be the acceptance of ads winding their way more and more into the Facebook experience.

We know the company is profitable going from US$229 million two years ago and US$606 million in 2010, which then jumped to $1 billion last year.

The IPO will be out to raise up to US$10 billion, and this will value the company at $100 billion and make founder Mark Zuckerberg worth a very cool $28 billion!

On what price it will list at, well that’s a big issue.

I liked Barry Ritholtz’s view, the CEO of FusionQ talking to CBS Moneywatch: “The key question is what will the stock’s valuation be? We’ll find out in the road show. If they’re making $1 billion a year, I’m not excited about paying 100 times earnings. This is an internet company. It’s not Apple selling $100 million iPhones.”

But the other issue is that this company is profitable on a few billion dollars of revenue, so what happens when the revenue becomes $10 or $20 billion?

Good buy or goodbye?

Ultimately the price of the share will determine whether we say “good buy” or “goodbye” to Facebook’s IPO and it’s not the type of stock I recommend to cautious clients wanting solid companies that pay consistently good dividends. However, it could make a nice speculative stock as its share price is bound to go up when Wall Street eventually recovers and then there’s the WOW factor that a company like this potentially has.

Remember, Google has done wild things like buy a little known, yet popular business such as YouTube.

Personally I have never liked underestimating people like Richard Branson, Bill Gates, Steve Jobs, Michael Dell and Larry Ellison and that’s why Zuckerberg could be worth a small punt, if you can get on!

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Friday, February 03, 2012

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