Don’t buy Facebook shares!

A few friends of mine in California calling themselves “Facebook” asked me if I want to buy 421 million of their shares at 38 $ a pop. I did a quick calculation and noticed that I don’t have enough money. Because of this, they are now having a yard sale which they call “IPO” for some inexplicable reason.

It may not be nice of me to tell you this behind my friends’ back, but I warn you: Don’t buy Facebook shares! They are a bad investment.

  1. The shares that are being sold aren’t real shares. Mark, the big honcho in the gang, will still retain 57% of voting rights after the IPO even though he will only hold 22% of the shares. In effect, you would give away money without having any control over what happens with it.
  2. Facebook doesn’t produce or sell anything that people need. Who needs a website where friends tell me what they had for breakfast? Or try to show off photos of their ugly babies? Nobody needs that.
  3. “But,” I hear you say “Facebook has 900 million users. That shows how popular they are.” Sure. But these users don’t pay anything. It’s like these free newspapers you get in the Metro or like porn websites: you use them because they are free, but you would never pay for it.
  4. What is more: Facebook will never be able to charge its users. Unlike quality publications like the New York Times or this blog who can switch from a free provision of services to a paywall model, nobody will pay for Facebook because it’s not unique. If Facebook would start charging users, most of them would go away immediately. And I bet that within a week at most, somebody else will have set up a site where you can upload photos and status messages. It’s not a hard thing to copy really.
  5. The only way Facebook actually earns revenue is advertising (apart from the illegal selling of all your personal data, that is). But one day, companies are going to find out that advertising doesn’t work, especially not online where I can install an ad-blocker and I won’t ever be exposed to advertising again. I recently did so, it took a minute, it was free and it works. I am now using my Facebook without seeing any ads. Nobody makes any money off me.
  6. The reliance on advertising revenue also means that the only way to increase revenue is to put up more ads. Doing this would annoy users and drive them away.
  7. Online hypes come fast, but they also die fast. I remember when a few years ago everybody was hyped up about “Second Life”. I never got around to having a look at it, and by now I think it is dead.
  8. Ask Rupert Murdoch about his investment in MySpace or the people who bought shares in GroupOn.
  9. Early investors are selling in this IPO. Nearly 60% of the shares hitting the market today are being sold by insiders. If these people who know all the numbers and the strategy would think that the share price would develop upwards, they wouldn’t sell now but remain invested for another 6 or 12 months at least.
  10. Facebook already has lots of legal problems, mainly stemming from its constant violation of data protection rights. Lawyers are even more eager to take on a publicly traded company, because lawsuits tend to have a negative effect on the share price which creates an extra incentive on Facebook’s behalf to settle and pay out lots of money to lawyers (and maybe a bit to their clients as well).

About Andreas Moser

You will most likely find me in the forest, next to the lake, reading a book. Just follow the cigar smoke!
This entry was posted in Economics, Facebook, Technology, USA and tagged , , . Bookmark the permalink.

15 Responses to Don’t buy Facebook shares!

  1. Dear Andreas.

    It was fun to read your post, however…. here is a quick rebuttal to your points:

    1. Err? Since when have regular folks (and I mean working stiffs that invest in stock) actually had a voice in what happens in the board room. Mute point, people invest in FB wanting to make money off its brand… pure and simple. Who cares if a brilliant, socially-challenged geek is at the helm. He got the company to 900 million users and beyond THAT is what people that invest in brands care about…
    2. ??? Well, arguably neither does that other Silicon Valley company founded by a brilliant socially-challenged geek AAPL, to be exact. Who really needs an iPhone, an iPad, or for all intends and purposes a Bang and Olufssen stereo? Need? no one “needs” things (appart from the basics) its called “Capitalism”
    3. Based on your argument, porn sites and free newspapers are the way to go except that wait— not “everyone” are visiting porn sites as much as you (assume) — sorry could not help myself. Basically, everyone is using Facebook as their new platform to be on-line. Check out the numbers… people are consuming more media, browsing, and simply being on-line than any other platform/ service. For millions of people Facebook=the net (sad but true) that is called having a captive audience, and in the words of some copy writer fo Visa, that is “Priceless”
    4. Now that is a weird argument. Let me ask you, when was the last time you paid to watch a (non-cable) tv program? And them TV guys made lots of money over the years because…. they could deliver eyeballs. “Users” that is the key to the advertising game. Plain and simple. If Facebook ever charged… yeah well, if pigs could fly… they will not charge, of course not, they depend on their audience being there, and that Obliterates your second point: sure others can create a platform, market it, and watch it grow in due time. Thing is no other company has ever grown its user-base as fast as Facebook. No one. Ever. Thousands others have tried, and will continue to do so. Good luck catching up. with the boys i blue.
    5.About that nifty little app: while it is true that AddBlocker may work for you and a few others, the truth is that any media, WITH ADDS actually works best for millions of people… That is how they buy the iPhone, iPad, B& stereo and other junk they don’t need. They watch it (for free) on TV or an add on TV (or web/ facebook) note this: a majority of people (52%) watch the Superbowl PRIMARILY for…. drumroll: the Adds! In any case, Facebook can block the damned thing any time they want, so don’t rely on this being around much longer.
    6. (do I really need to continue? Sigh!) Ok, in short: repeating an argument based on wrong assumptions in a post does not make it true. It makes it, well, annoying, it drives readers away.
    7. As does everything these days. Millions of people like it that way it drives the economy. However, brands last longer than fads. Like coke, like Apple, like, well Google and Facebook. Getting to understand the difference between a fad and a brand is crucial when talking about investing, and wasn’t that what this post was all about in the first place. Like it or not, FB is a brand. Not a fad.
    8. Sure, i can also ask Mr. Murdoch about 20 Century Fox, or Bill Gates over hotmail, or President Obama for betting on GM. My point? Simple: for every successful enterprise hundreds (if not thousands) have failed. It is the nature of life. Of business. You should get inspiration from one Thomas A. Edison. He invented and held patents for thousands of inventions, most of them useless…
    9. Actually, the purpose of investment is to… well, turn a profit. Some of these “insiders” as you call them, have invested in FB for several years. Now they want some money back on their investment. Again, it is the nature of the beast. Fact is, many early investors are barred from trading their shares, and others are just trading a portion of their holdings.
    10. Seriously? The lawyers? You are worried about the lawyers? Last I checked most (if not all) of the leading companies in the globe (and not just tech) are involved in litigation and lawsuits without end, in an almost permanent manner. Apple or Google have in recent times lost several IP cases and are subject of investigations by the authorities for a number of reasons, and still, the companies stay strong, even though neither one of them produces anything anyone really needs…

    Full disclosure: For the better part of a year I was professionally involved in the promotion of Facebook shares to certain Funds and HNWIs. I like the company, and am bullish about it, but only because I understand Social media and the power of branding. I would NEVER ADVICE anyone to invest in FB or any other security if they cannot assume a risk, or even if they are not comfortable with the (potential) investment. Luckily for me, my potential clients were all significantly sophisticated and could afford the risk.

    Now that we both had our say, let’s watch the market decide and see.
    Cheers!
    Ed

  2. Ed, I don’t necessary subscribe to all the 10 points that the author of the original post has written, but I can’t help responding to your comments.

    First off, FB may be a good company with a solid business model — that I agree with. But, pray tell, how exactly would you justify the super high debut price today? If we want FB to give the same 9x return that Google did to those folks who invested in GOOG and kept the stock since then, then FB needs to be valued around $1 trillion by 2020! Do you really believe this would happen?!?!? The early investors who got into FB a few years ago are indeed the real (and only) winners here — as has been with so many IPOs before and will continue to be in the future. But the fact they’re eager to offload immediately tells you that this IPO was just meant to be an exit strategy for them. If you agree with this statement, then you should also agree that it really does not make any sense for “average Joe” investors like you and me (or the author of this blog) to get in on the FB bandwagon now. It is way too late for this! I think that is the main point that the author is driving.

    Secondly, it’s one thing to look at how over-the-air TV channels make money from traditional advertising, and a completely different thing to expect the same results from the so-called social ads. Facebook’s ads have been nothing more than glorified PPCs (pay-per-clicks) so far. All this hype about more targeted and contextual advertising because of people’s timelines, etc. is… well, just hype. One day, someone may figure out how to turn this hype into economically sound reality, but we’re still far from it. And nothing guarantees FB and Zuck will be the ones that accomplish this.

    Thirdly, and I’ll leave it at third points — because I really don’t like those “10 things about [plug whatever topic you want here]” lists — why don’t you refresh your vocabulary before starting to type on a public forum? I’m not really talking here about mere spelling mishaps that we so often call typos. I’m talking about wrongly using homophones when trying to express your thoughts. It’s a “moot point,” not a “mute point.” And the commercials you see on TV are ads (or adverts as the Brits call them) but they are not “adds” because they don’t add to anything. The list goes on but I’ll leave it for you to do your due diligence (hopefully better than the due diligence you did when you promoted overpriced FB shares to those funds you mention). Sorry for attacking you personally on this point, but you did sprinkle a few innuendos at the author of the blog in your comments and I just wanted you to realize how unfair (and insulting) that could be. No hurt feelings, I hope! :)

    I also hope you’ll agree with at least some of my logic here. Cheers!

    And great job to Andreas Moser for the original post!

  3. John Erickson says:

    I love that GM has pulled their advertising bucks from FB, and everyone is claiming they’re idiots. Everyone, except for one VERY brief report, that mentioned that GM can keep a free FB presence, and still attract interest with their “home pages”, without shelling out any money. That report (on CNN, if I recall correctly) disappeared VERY quickly! ;)
    FB may be the flavour of the month, or year. Let’s see where they are in 10 years. (Not like I have any significant money to invest right now, anyway.)

  4. kmar2261 says:

    2. Perhaps people don’t need anything facebook produces, but they definitely want what it gives them: the ability to connect with other people, to be heard by other people, and to be entertained.

    3. Users don’t pay anything? What has that got to do with it?
    Are you implying that facebook users are not legitimate because money doesn’t change hands?
    Perhaps you don’t understand how the popular free (or freemium) model works.
    There is a multitude of ways to make money, the least of which is demanding payment from subscribers.

    4. Same as #3.
    I agree with Ed. Facebook will never charge. Their value is the “900 million users,” and they are not about to do anything to drive them away.

    5. I’m in the newspaper business, and guess what? The main way we earn revenue is through advertising.
    Imagine that!
    By the way, we do charge our subscribers a nominal fee, but it barely covers the cost of distribution.
    I know several local FREE publications that make a decent profit – through advertising, no less.

    6. Here’s another subject that translates well to the newspaper business.
    The balance of advertising vs. content can be tricky.
    Since advertising makes up the bulk of your revenue, the publisher wants to see LOTS of it. However, if you have TOO much, your readers lose interest, and subscriptions drop off.
    Of course, when you lose eyeballs, advertisers begin to lose interest, and revenues drop.
    It’s a constant juggle, making both parties happy. Yet, it is crucial to having a successful newspaper.

    That’s my two cents, for what it’s worth.

  5. It’s interesting to hear different people’s rationals for why or why not to buy into Facebook .. I’m thinking that, if the hype helps you benefit from owning the stock, short or long term, when why not go for it

  6. OK Facebook has 900 million users. Its huge. But that means it’s harder to get bigger. Unless FB can continue to show growth the price will IMHO fall. Long term FB has to be bad news,the only question is when to buy the put options.

  7. Eric Pierce says:

    Facebook is horrible software with a few redeeming qualities. Subscribers are NOT the “customer” they are the PRODUCT (their information is being sold to advertisers). We will see if arrogance is subject to short term laws of karma.

  8. darlarodgers says:

    I understand some of the criticism of Facebook and some of the anger that people feel towards them, but I think that most of your points are wrong or just don’t impact Facebook’s stock negatively over the long term.

    * There’s nothing wrong with trying to capitalize on advertising when you get in the neighborhood of 1 out of ever 4 page views online and have a lot of structured social data about peoples’ preferences. Facebook isn’t limited to social networking ads though – think long-term about what Facebook is going to do with this data – its all about search for starters. Facebook has the resources and data to launch an honest to goodness search engine that competes with Google. This market is worth hundreds of billions, and why Facebook’s stock will tank in the short term but can potentially explode long-term if they execute.

    * As a self-interested company, it is not in Facebook’s interest to sell the private data that they have about people. A guy that owns a goose that lays golden eggs isn’t going to sell the goose, you get it? It’s in their best interest to protect peoples’ privacy and hoard this data for themselves. And this is always what happens. Regardless if a company decides to use Facebook ads directly or third party advertising options listed at http://www.buyfacebookfansreviews.com for example, there is no way that any company is gaining personally identifying information about people through any kind of advertising.

    * Most privacy issues through Facebook are self-inflicted injuries where idiots post personal data publicly, post on Facebook while drunk, don’t use privacy settings, friend random strangers they don’t know, etc. Facebook is actually much better at privacy than most of the media gives them credit for.

    * There are some legitimate privacy issues with Facebook that have to do with the following but these are almost never mentioned by the media. I think that these are real flaws IMO.

    – Government/law enforcement gaining access to private data without a warrant.
    – Bad apps that require permission to unnecessary personal data to run

  9. Tom says:

    To “darlarodgers” the reason why google search technology leads is because google does actually have a technology behind It’s serch engine: http://en.wikipedia.org/wiki/PageRank .
    In turn question can be asked about how well a search engine based on past stories and pictures and gossips will perform against google search.

    Cheers

  10. Roy says:

    What about google …theyd dont charge their users for anything and they earn 97% of their income from selling ads…like facebook…..googles shares are great to have

    • But Google offers a useful service.
      And (some) people who search on Google actually WANT to see some of these ads, for example when they search for a lawyer or a dentist.

  11. Roy says:

    900 million plus users find beneit and usefulness in FB

    Whether its socialising…or sharing pictures and other things with family and friends…whether its finding new friends they never would have met….or just keeping track of friends all in one place…etc

    They find benefit in FB…thats why they keep going to it

    but remember

    apple shares were once around $50

    now they are more than $400

    most people look at what is

    while very few look at what facebook can become

    they say fb only business model is ads and that everything else it offers is free

    same goes for google

    97% of its revenue is from its ad program

    and it offers everything for free

    having google shares or buying it back when it came out was a very good idea

    http://finance.yahoo.com/q?s=GOOG

    google shars started at $100

    apple shares started at $25 in 1984

    who knows….facebook may be replaced by something newer

    but i say FB has tonnes of cASH….and they could always diversify its product base

    like get into other fields….like how they bought instagram…out of the blue

    look at microsoft…they are in the mobile business…..b2b sector and in gaming

    who would have thought

    its a young company

    who would have thought apple would go into the mp3 and smart phone and games and music business

    buy some shares and hold onto them/…for 10 years….20 years…give it to your kids

    do i think fb will suffer the same fate as myspace…..i dont believe so

    there is too much at stake

    the truth is….the govts and law enforcement agencies have a indirect and vested interest in FB

    it allows the monitoring of people so easily…..better than any such tool in the past

    have you realised something

    in the past…all ads….including ads that appeared in the superbowl…even ads for movies….they would have a website

    not anymore…..now they show their facebook URL

    i saw a trailer before the avengers movie…..no website….just a facebook page URL

    thats the trend now

    why….because of FB’s social aspect

    who knows….no one knows the future

  12. paul mitford says:

    Facebook shares are for foolish, flippant, fucken farts who make the greedy gecko look good. paul mitford . sydney, australia.

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