Stock Of The Week: The Top 10 Reasons Not To Buy Stock In The Facebook IPO

May 18, 2012 8:36 AM ETMETA
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Contributor Since 2012

I am an investment professional currently working for the amazing Wall Street Bad Boys.

The long awaited Facebook IPO is about to debut but here are ten good reasons why investors should not like or befriend Facebook stock:

  1. Remember MySpace and Friendster? They were among the original social networking sites until (of course) Facebook came along and became the social networking site. I should note that Friendster is now headquartered in Malaysia because it still has a wide following in emerging markets like the Philippines but it's reinvented itself as a social gaming site while MySpace was recently sold for $35 million, far less than the $580 million News Corp. paid for it in 2005.
  1. Is Pinterest the Next Facebook? With the decline of MySpace and Friendster after the rise of Facebook in mind, Pinterest is has the potential of being the next big social networking site as Wikipedia calls it a "pinboard-style social photo sharing website that allows users to create and manage theme-based image collections." In March, it became the third largest social network in the United States, surpassing Linkedin and Tagged, plus it has just raised $100 million on a $1.5 billion valuation.
  1. There Aren't Enough People to Sustain High Growth Rates. Planet earth is estimated to have at least 7 billion people with 1.3 billion of those people living behind the "Great Firewall of China." Facebook is estimated to have 900 million active monthly users. Granted and in theory, there is still plenty of room for growth BUT at some point there will simply not be enough people left who want or need Facebook accounts.
  1. Facebook's China Problem. For the most part, few Chinese can access Facebook thanks to the "Great Firewall of China" plus homegrown Renren (RENN) may reach 200 million members by the end of the year. And if Facebook were to do a deal with the Chinese government in order to gain access to the Chinese market, the backlash abroad would probably not be worth it. Moreover, other countries like Vietnam have periodically tried to block their citizens from accessing sites like Facebook that lie beyond government control.
  1. Krispy Kreme, Crocs & Other Fads Have Trouble Making Money. Krispy Kreme Doughnuts (KKD) and Crocs (CROX) are two popular brands with a history of troubles after IPOs. Specifically, Krispy Kreme Doughnuts (KKD) faced earnings declines, concerns over its rapid expansion and an accounting scandal while Crocs (CROX) faced competition from knockoffs and has even become the butt of jokes and satire.
  1. Facebook Privacy Concerns Have Not Gone Away. Despite efforts to address privacy concerns, a recent poll found that only 13% of respondents trust Facebook "completely" or "a lot" when it comes to keeping their personal information private while 59% said they trust Facebook "only a little" or "not at all."
  1. Society Moves Away From "Reality TV" Lives. While posting status updates or tweeting about one's every move or thought is popular now, society and culture could change where people move in the other direction and demand some sort of privacy in their lives. That may not mean giving up social networking sites altogether but it would mean spending less time on them.
  1. Facebook's Revenue Model is Based on Advertising. Advertising accounts for 82% of Facebook's revenue for the latest quarter with the rest coming from the purchase of Facebook "credits" in order to buy virtual goods like chips in "Zynga Poker" or cows in "Farmville." However and last year, only 15 million Facebook users or roughly 2% of the total bought any type of credits at all. Moreover, advertising on the screens of mobile phones and other devices generally does not make much sense as the screens are too small. And while Facebook is apparently working on trying to find away around this and have ads - don't expect any such move to be embraced by Facebook users and for that matter, whatever new competition comes along in the future.
  1. Management is Still Young and Inexperienced. Zuckerberg may be a rock star right now but he and nearly all of Facebook's senior staff are still fairly young to be running a company with a multibillion valuation and a global reach. There is also a question regarding control and how decisions are made. Case in point: Zuckerberg spent $1 billion on Instagram (apparently without consulting anyone) while in contrast, Yahoo! paid $35 million for Flickr in 2005 and its now one of the most popular (and hence valuable) websites in the world.
  1. Riches Will Change Zuckerberg et al. No matter how much Zuckerberg and other Facebook insiders say that money won't change them or how Facebook is managed, it will. Some will inevitably want to cash out and enjoy the good life while other insiders and the company itself will change in ways we can only now imagine.

In other words, Facebook may already be near a zenith with its IPO. In other words, Facebook is definitely a stock that investors and traders alike will want to keep an eye on by having it listed on's My Portfolio page.


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