This week Facebook registered for their IPO. An IPO stands for initial public offering and means that, for the first time, Facebook stock (piece of ownership of the company) will be offered for sale to the public. Facebook will raise about $5 Billion selling only 1/20th of the company. That makes the Facebook IPO (by far) the largest IPO by an Internet company. (The Google 2004 IPO was just over $1.5B). The $5B IPO will value Facebook at $100 Billion. At that value, Facebook will be one of the most valuable companies in the world.
It is easy to make an argument why Facebook would have that value. It is an elite Internet property drawing in users and huge advertising dollars. Today, it has more than 800 million active users.
Compare that the population of the United States at 300 million. Impressive.
Facebook also makes a lot of money. It revealed in its IPO filing that in 2011 it had profits of $1 billion on sales of $3.7 billion. Despite these strong numbers, I believe that Facebook is a bad long term investment.
Several months ago my daughter Brittany and I were having a discussion about the long term viability of Facebook. She was talking about her kids using Facebook. I (half jokingly) said that Facebook will not even be around when she has kids (she is 16). She shot back that she never uses email (even though she has had an email account for years) because she either sends a text or uses Facebook to message. She said that everyone her age uses Facebook to communicate. I know Brittany and her friends spend an amazing amount of time on Facebook. They post their status, pictures and generally keep up with their friends and the community on Facebook. It is truly a primary form of communication for teens and many adults. I have been told on many occasions that I should use Facebook instead of blogging on this site because everyone is on Facebook and it is just easier to track.
So why am I saying Facebook is not a good long-term investment? First, and most obvious, it already has an extremely high value. Not unreasonable, but high. Second, we are not exactly in a down market. Technology stocks and the market as a whole has been doing great for some time. Because of the bull market, there are few bargains to be had. Third, because Facebook has been an unmitigated success attracting millions of users every year, its growth with undoubtedly and substantially slow over the next few years. It already has 800 million users. The United State is saturated. Finally, I think Facebook is not a communication medium that people will be using to any substantial degree in 8 years. It is not a flash in the pan - but it might just be the flavor of the month (or maybe decade).
Back to my conversation with Brittany about her kids using Facebook. After Brittany made the point about the dominance of Facebook, I tried to give her some perspective.
I asked, "Have you ever heard of Netscape?" No.
"Have you ever heard of Prodigy?" Never.
"Have you ever heard of CompuServe?" Nope.
"How about AOL?" Maybe but I don't know what it is.
These were all absolutely dominate companies in the early days of the Internet. AOL was so successful that it purchased Time Warner.
"How many people that you know use MySpace.com." Almost none.
MySpace was Facebook before Facebook.
Internet companies come and go because competition is high, barriers to entry are low and users can switch to the next best thing with almost no cost. Twitter could kill Facebook.
Google+ could do it.
Noelle was telling me about a small but increasingly popular iPhone app called Instagram that lets users friend each other and post pictures.
A company or technology that we have never heard of today could kill Facebook in 3 years.
Facebook is not Google. Google is more Microsoft Windows - a base technology and system for the Internet. Facebook is My Space - the flavor of the month.
Do I think Facebook will around when Brittany has kids? Yes. It will like AOL. It will be around - but irrelevant.
