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Facebook's Flop

|Includes: Facebook (FB)

I just finished reading an article about Facebook's IPO by another Seeking Alpha contributor. He basically stated that greedy, evil bankers and selfish shareholders were the only ones that made money in the deal while the public got ripped off. While I wholeheartedly agree that the only ones who made money in the Facebook deal are the underwriters and shareholders, it was fully disclosed in the company's S-1 that they basically had no plans for the money. I think it actually said their plan was to invest in investment grade fixed income (aka do nothing with it). Did John Q Public get screwed? You bet.

Where my opinion tends to differ is that John Q Public got screwed not because of any sort of deception or wrongdoing, but because Mr Public exhibited outrageous hubris in thinking they know how to invest (meanwhile if you asked about the S-1 they would say "no I drive a c350, not an S-1"). I've seen it. I can't tell you how many people I know who practically sunk their life savings into Facebook stock saying "there is nowhere for it to go but up!", even after my words of warning saying that there is no growth left and they're valued at over 100x earnings. What would I know though? I'm sure a pharmacist and an engineer know more than I (BS & MS in finance with 4 years of industry experience). I'm not saying I know everything, but I know a sucker's bet when I see it.

I also realize those who got ripped off will be the same people standing in Zucotti Park screaming they got ripped off by evil bankers and demanding tighter regulation and their money back. I bet they wouldn't be so upset if Facebook's stock soared to $70.

I guess my main point here is that if you don't understand what you're doing, you have no right to be upset when it doesn't turn out the way you hoped. I'm a financier by training. Every now and then I try to do construction projects around the house. Sometimes they turn out well. Sometimes they don't. I don't get mad at tool manufacturers when I screw up and things don't turn out the way I hoped.

Overall opinion of Facebook as an investment: let's do a quick sanity check. Their 2011 revenue was $3.7 billion. At a $104 billion valuation, that means they're worth 28x revenue. A company of that size should be worth 2-3x revenue if they're high growth. Facebook already has 900 million active users. There are approximately 1.2 billion people in the world with computer and internet access. They need to grow revenues over 2,000% just to be valued correctly. If they grow revenues 1,000% they will have the same revenues as Google.

So, if you buy Facebook, you're betting:

A) They will be worth more than Google in the near future

B) The number of global computer users will grow at an explosive rate (because remember, you can only access Facebook if you have a computer with internet access)

C) Facebook's revenue will grow 2,000%+ in the near term

D) The world won't move on to some other form of social media

E) Social media will still exist in the long-term

F) Facebook will be able to successfully be able to monetize mobile users

To be clear, I do not believe it. I'm calling their bluff. The company went public to cash out shareholders. Good for them they were able to pull it off. They were the lesser fools. We still don't know what social media is. Facebook could be the next Google (or Google of its industry). It could also be the next AOL.