Finally, the long-anticipated initial public offering (IPO) of social media giant, Facebook is happening this week. Is it a good to go as an investor to invest in FB?
Following all the discussion we had about invest in stocks as businesses, we have to ask ourselves 2 key questions:
1) Will we be confident in the sustainability of Facebook’s Business Model?
2) Is Facebook IPO priced at a reasonable price for investors.
Lets start by looking at Facebook as a business.
Facebook as a business is doing very well currently. I use facebook for both personal as well as business purposes. Within my circle of business friends, Facebook is also one main way business is done, especially in terms of advertising. The key question is of course, sustainability.
For sustainability, it is a 50/50 to me. As investors, we are always looking for a business that can be predictably and has an economic moat. In my previous posts, I talked about using STEP analysis as a framework to analyze if a business has a strong economic moat. Facebook seems alright when it comes to Economic and perhaps even Political Factors. The uncertainty lies in the Social Cultural and Technological factors.
Even though Facebook had captured a huge market pie today, given the rapid change in Technological as well as the fast paced lives of the younger generations (Y and Internet generation), without new innovation and information, interests dies down pretty quickly. Thus, the sustainability of Facebook is uncertain in this aspect.
The person leading Facebook is Mark Zuckerberg. He is a proven genius and that actually worries me. As the saying goes:
“Buy a business any fool can run, because someday, one will.”
Can any fool run Facebook? I think it had not reached a stage to run on its own. Mircosoft may have faced the same situation in its early years, but currently, based on the Network effect that has been strongly ingrained, Mircosoft is now a necessity more than a luxury or entertainment that cannot be dropped in businesses and even personal usage.
Google and Facebook has captured audience, but lets not forget that just a decade ago, Yahoo and Friendster was the buzz word. So what will happen a decade later, I am not able to confidently point my finger to currently.
That being said, should Facebook still be growing strong 10 years from now, then it will be certainly more obvious than now as to whether a moat is existing.
The 2nd factor is price. If the business has a big enough margin of safety, we can think deeper. But, qouting from Crown Financial Ministries’s Chuck Bentley:
“Facebook intends to offer 337.4 million shares at a price of $28 to $35 on NASDAQ under the symbol, FB. Although advertising revenues are estimated to reach $6.1 billion in 2012, the valuation would price Facebook stock at 24 times revenue, compared to 5 times revenue for Google. ”
Logically, will you pay 24 times for a business’ profits? Will FB’s growth be enough to make it worthwhile? Again it is uncertain.
So what does it mean for Value Investors? Value Investors go for certainty and predictability and not hypes.
As of now, it is to stay at the side line and hey, there are more than enough great business that are predictable and are selling at great prices.
Join us at our next live workshop where we analyse stocks together.
To your dreams,
Mind Kinesis Research Team