Don’t Buy Facebook Stock. Yet.
Facebook’s stock launches into public markets today. Here’s why I won’t join the fray quite yet.
Facebook Does Not Have A Great Monetized Product.
The key word is “monetized.” Google AdWords, which is Google’s paid search product, is the gold standard of online advertising.
Not so with Facebook ads. Some, like General Motors, say it doesn’t work. Some analysts agree. And still others say Facebook ads are effective (scroll down a bit). The jury is very much out.
Bottom line: Facebook’s revenue performance isn’t going to be the tech rocket ship some people expect. In fact, I expect their financial performance to flounder until they release a better monetized product.
Facebook’s Financial Performance Will Be Uneven
Markets hate uncertainty and punish it with lower stock prices. Without a great monetized product, their earnings will fluctuate. Markets hate fluctuations.
Facebook made 6.5% less money in Q1 2012 than they did in Q4 2011, and their profits fell 12% year-over-year. Neither of these are disasters. Ad spend is usually higher during the holidays and Facebook is investing more now than last year.
But let’s compare to Google’s growth in 2004. They grew 409% and 234% year-over-year, and grew over 100% each quarter, all because their monetized product is extremely effective.
I think Facebook will continue having these little peaks and dips for a while. Within a few quarters, some investors will decide Facebook is all hype, will dump shares, and the share price will fall.
Facebook’s Potential is Longterm
Facebook’s most valuable asset is their 901 million users. Investing in Facebook is like investing in a bank: you’re betting they can make use of their gigantic holdings in a way that delivers extraordinary returns.
When you buy Facebook stock, you’re betting Facebook will eventually figure out how to make use of this remarkable and unique asset.
Display ads, payments, hardware, and search are all areas where Facebook could apply the data collected from their users to create enormously valuable businesses that threaten Google, Amazon, and Apple. Learn about these scenarios here, here, and here.
When Will I Buy Facebook Stock?
The “when to buy” question is often an exercise in gambling. Maybe Facebook will never again sink to its $38 opening price. Or maybe, as the world’s foremost expert in valuation says, it’s priced appropriately and won’t pop much. Who knows.
My thesis is it’ll pop a bit, will hang out rather high for a few quarters, and then sink. That’s when I’ll buy.
Or, Facebook will announce a blockbuster monetized product, or evidence the internet is consolidating on their platform. That’s when I’ll buy.
Until then, my prediction is the market will get fed up with watching Zuck & Co. figure out how to effectively monetize their users and the stock will take a beating.
Of course, predicting this kind of thing is begging for trouble. If digital marketing spend actually doubles in the next 4 years, Facebook just has to tread water to increase revenues. So maybe it’ll be me taking a beating, both from myself and from my readers, for being so gloriously wrong.
PS: my lawyer wife told me to say this: I am not an investment advisor and you should not treat this post as investment advice.
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