Ok folks, it's not often that I issue a rank 'do not buy' statement on an S-1 (in fact, since starting the Ticker I can't recall ever doing it) but this is one where I feel I need to. It's Facebook.
I'm basing this on one, and only one, criterion -- the rate of acquisition of new accounts is slowing. That's all I need to know and it should be all you need to know -- the company filed the S-1 as soon as they detected this slowdown in December.
In addition, participation is narrowing; there were 1.74 users monthly per daily user in 2011, but 1.86 a year prior.
These are potential signs of leveling off. The deal with almost certainly price assuming a ridiculous price to sales and price to earnings multiple, which means that the growth numbers must be maintained as the P/E/G ratio will be in the stratosphere. If it's not you're going to get your head cut off.
Further, upon reading the S-1:
- The company identifies no particular need for the capital; it has cash. This strongly implies that the only reason to IPO is for the insiders to monetize their position. Why, if it's rapidly growing in value and there is no meaningful risk to that value vaporizing (and nobody knows better than top management if this is the case!) would the company do this now?
- All of the direct payments revenue are for the purchase of "virtual goods" (e.g. things on Farmville); there is no actual hard good or service delivered in exchange for money. That's not shopping, it's pretty close to burning money. How long will that furnace keep operating?
- I don't buy the ad revenue model. This is not Google (GOOG) and it does not have to be very intrusive into your experience before people leave. If they leave, Facebook is dead. Advertising is 85% of their revenue. When have you become aware of -- or purchased something -- based on a Facebook ad? My answer: Never.
- Facebook is a fad. Myspace anyone? Sure, there's apps and all this other stuff, but at the end of the day.... it's a fad. Tastes change, often quickly.
- The primary means of creating value for advertising and marketing purposes is through mining the data. But that's in direct conflict with people's desire to not have their data taken and used for this sort of purpose. The balance between making money off what people share with their "friends" and stepping over the intrusiveness line to the point that people feel exploited is a fine one, and not necessarily known in advance. The execution risk here is very high and the company and its image is less open about this fact than it is about what looks like a warmed-over version of the "Hacker's ethic."
- The mobile environment currently has no advertising. The PC-based environment, since the latest changes Facebook made to the layout, is (in my opinion) hideously slow and nearly unusable -- and I have both a ridiculously fast Internet connection and an 8-way multiprocessor computer. For people with less how responsive is it if I find the performance annoyingly bad?
- There is a disclosure in the S-1 that they are using leasing facilities that are not on the books. I strongly dislike all off-balance-sheet activity of any sort.
- This is not a company that will actually be publicly owned and it will pay no dividend. Zuckerberg will retain full control of the board and all corporate matters as he will have a majority position even if all the other shareholders vote against him. Since the company also intends at present to pay no dividend you are buying on one thing and one thing only -- the premise that in the future some greater fool will pay more for the shares you buy in the IPO.
I'm not touching this one.