Facebook (NASDAQ:FB) will hit the markets tomorrow in one of most hyped and anticipated IPO's of a generation. Judging from the pre-IPO activity and the raising of the price level range on Wednesday, it appears that the IPO will be oversubscribed and the stock will have a nice pop to start its trading and should end its first day on the market with an eye-popping valuation of between $100B and $120B. If you were not lucky enough to be an early investor or employee of the company and/or did not secure a pre-IPO allocation; I would caution on buying shares after shares hit the market. Here are ten things to consider before buying into the Facebook hype.
- Facebook is going to be priced at 25 times revenues which seems excessive given it is likely to grow revenues at 30% to 40% a year.
- Almost all of Facebook's revenue comes from advertising, the effectiveness of its advertising is questionable. General Motor's (NYSE:GM) announcement that would not buy ads on Facebook any more should give investors caution as it had previously allocated $10mm annually to the site for advertising.
- An investor has few shareholder voting rights as the company chose a structure that is commonly used for media companies. Mark Zuckerberg will have the same voting power as non-imperial media CEO's like Summer Redstone of Viacom (NASDAQ:VIA) and Rupert Murdoch of News Corp (NASDAQ:NWSA).
- The extra allocation of shares the company announced Wednesday (From 14mm to 18mm shares floated) will come from insiders. If insiders are selling more shares, should an investor be buying?
- You are entrusting a 28 year old to run a $100B company. Sure, Zuckerberg might turn out to be the next Steve Jobs of Apple (NASDAQ:AAPL). Of course, he could just as easily turn out to be the next Jerry Yang of Yahoo (NASDAQ:YHOO). My opinion is he is going to be more like Amazon's (NASDAQ:AMZN) Jeff Bezos as I think he will sacrifice margins for growth and will prioritize users over shareholders (AKA, no dividends).
- Investors also will be investing in a company with a compliant board of directors judging by the process of acquiring Instagram over one weekend. A billion dollar purchase of a company with no revenues without board participation is a red flag for me.
- Now that Facebook is a public $100B plus company, it has a regulatory target on its back. Look for increased congressional scrutiny and for data privacy concerns to accelerate.
- Facebook is coming public as a much higher multiple of revenues than Google (NASDAQ:GOOG) did in 2004 even as Google as a much more lucrative and defined business model.
- More than more traffic is migrating to mobile platforms. Most of Facebook's traffic comes from its desktop site and it will have to manage this migration well in order to maintain its momentum.
- Most of the user growth in Facebook will be dependent on international expansion as the United States is pretty saturated. This will be a challenge given some established players in key countries like China and Russia and managing a multi-national business increases complexity substantially.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.