Facebook Should Have Never Become A Public Company

May.31.12 | About: Facebook (FB)

When a company goes public, it's a sign to the market it must begin delivering profits. Companies go public in order to raise capital from investors who want a stake in the company. Why I am going over something that was taught in finance 101? Well, mainly because I don't think Mark Zuckerberg ever understood the meaning of going public.

"We think it's important that everyone who invests in Facebook (NASDAQ:FB) understands what this mission means to us, how we make decisions and why we do the things we do. We don't build services to make money; we make money to build better services. We don't wake up in the morning with the primary goal of making money. We're going public for our employees and our investors."

- Mark Zuckerberg, CEO of Facebook

Now I am always a big fan of companies putting their products before profits because, in the long run, shareholders will be happy. This is one of the reasons that made Apple (NASDAQ:AAPL) great. However, Facebook is a whole different story. Facebook has VCs breathing down the company's neck. The VCs of Facebook have one goal and that is to make money.

I understand investors have been looking to get exposure to social media stocks, but Facebook should not be one of them. There are better companies out there with stronger management teams. LinkedIn (NYSE:LNKD) is doing well and will continue to perform well as hiring starts to pickup again. Management has been pushing for HR departments to begin to start recruiting through LinkedIn. LinkedIn management is more shareholder-friendly than that of Facebook's.

Zuckerberg also has no sense of proper acquisitions. When he shelled out a $1 billion for Instagram, a company with no revenue, I realized Facebook was going to become a poor investment. It was an even bigger issue when he didn't even consult with the board of directors on it. Technology companies need to understand how to properly value a company before acquiring it. Just use history as an example of this. Remember when HP (NYSE:HPQ) paid $1.2 billion to buy Palm. HP was not able to monetize on the acquisition and it ended up being a failure. Cisco (NASDAQ:CSCO) paid $590 million to buy the flip camera business. Cisco was not able to profit on this and just ended up killing it off. Both Cisco and HP have done poorly and that is partially due to poor acquisitions. However, the scary thing is that Zuckerberg is more reckless with capital than these companies.

The reason I wrote this article was to let people know that no matter how tempted you are to buy Facebook, you should just stay away. Facebook went public so VCs could dump their shares at a overvalued price to retail investors.

I admire Mark Zuckerberg, but becoming a CEO of a public company is a whole other story. He also has majority voting rights, which is another reason he was able to execute the $1 billion Instagram deal with pretty much nobody knowing about it.

Facebook has a forward P/E of 49. Its market cap is around $68 billion. Not only does Facebook have a scary valuation, but management is very little concerned about profits. I honestly do not believe Zuckerberg has any intention to make money on Instagram, he just wants another feature for users. This feature will more than likely not increase revenue.

High valuation plus no concern for profits is a recipe for disaster. Those thinking about buying into the hype of Facebook should look elsewhere. Management is one of the most important factors in analyzing a company. Facebook's management has very little concern for shareholders.

For those of you that want exposure to social media, I would rather recommend you buy LinkedIn instead. While I am not a fan of LinkedIn's forward P/E of 80, I do like the fact that management is not reckless with capital. LinkedIn is also a smaller company, which means they can still grow at a higher rate.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.