Facebook IPO hype could bite investors

Though there's lots of buzz, traders and consumers should temper their enthusiasm for the social-networking giant.

By InvestorPlace Feb 1, 2012 9:40AM
Updated Thursday, Feb. 2

By Jeff Reeves
 

Social-media giant Facebook filed for its initial public offering Wednesday. The company's filing documents say it generated $3.7 billion in revenue in 2011 with $1 billion in net income, a 27% net profit margin. Revenue was up 88% in 2011 after a 154% gain in 2010. The offering shows that CEO Mark Zuckerberg owns 28% of the company and earned $1.48 million in salary and bonus in 2011.


But there are still a lot of unknowns: how the user experience will change, how profitable Facebook will continue to be and, of course, how Zuckerberg and company will spend the mountains of money they rake in from a stock sale.

 

But one thing is for sure: This could be the most-hyped IPO in recent memory. And that enthusiasm could be bad for investors who try to get a piece of Facebook.


Post continues below.

Facebook has grown from an online diversion to a vital part of modern communications since its birth in Zuckerberg's dorm room nearly eight years ago. According to media reports, the market value of the company will range between $75 billion and $100 billion after its IPO. The $10 billion raised from public investors will theoretically go toward increasing the reach and scope of Facebook's services, with hints that some type of journalistic foray is on the way, judging by the purchase of the domains that are variations on the phrase "Facebook newsroom."

 

Consumers and Facebook junkies know the appeal already. You see pictures of the grandkids or old college roommates. You get news from your favorite sources. You get special deals, play games and more.

 

But investors need to be wary here. The question isn't whether Facebook is fun but whether it will always be profitable.

 

In September, eMarketer estimated Facebook's 2011 revenue at $4.27 billion, more than double that of 2010. But such a figure is irrelevant without details on costs. After all, General Motors (GM) managed to rake in tens of billions in revenue but still go bankrupt; profits are what really matter. CNBC reported last week that "the company's expected to earn about $3.8 billion in 2011 full-year revenue and roughly $1.5 billion in operating profits." But that's just speculation. ZDNet questioned those numbers but still figures Facebook is profitable.

 

A long way of saying that all this hype about Facebook's IPO comes amid great uncertainty over whether it can continue to to turn a significant profit.

 

What's even more disconcerting for investors is that Facebook is the hottest ticket in town, talked up by some folks who don't understand the nature of IPOs or the stock market, and that has pushed pricing sky-high. Mark Hulbert estimates that Facebook's stock offering will be priced nearly 40 times above the average large-scale IPO of the last 40 years.  

 

That's saying something, considering that despite Facebook's mammoth $5 billion price tag it won't even crack the top 10 largest IPOs in history.

 

Even more disturbing are echoes of the tech bubble from 10 years ago. Social media companies like LinkedIn (LNKD), Renren (RENN) and Pandora (P) rushed to the IPO scene in the past year to capitalize on the buzz created by a Facebook offering and general enthusiasm for all things social. Many flamed out spectacularly after the facts of their rather disappointing operations came to light. But now these companies are rallying on little news, simply by virtue of being in the same sector as Facebook.

 

So to summarize, we have a company that has questionable profitability but a nosebleed valuation -- and the optimism over its IPO has lifted the entire sector without discretion.

 

Sounds an awful lot like the dot-com bubble, if you ask me.


Until there is hard evidence that Facebook will continue to be as good at making money as it is at killing worker productivity at the office, Wall Street would be wise to temper its enthusiasm.

 


Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace​​.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.

 

 

 

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14Comments
Feb 1, 2012 11:28AM
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The Facebook phase is going away. I hate it because I own a business but it's their own fault.  They keep changing it.  They don't give us a  chance to get accustom to the change before they change it again.  Now for someone who is like me..........that is extremely annoying and makes me want to say "forget Facebook".  If it's not broke.....DON"T FIX IT!!  With that said, I appreciate change but there is a point where too much change is not acceptable.
Feb 1, 2012 11:07AM
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The FaceBook phase is fading away.
Feb 1, 2012 11:54AM
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People don't go on Facebook to buy anything.  They are there to communicate with friends, family, strangers, and maybe to play some games.  From what I understand they do make some money off some of the games that people are stupid enough to spend money on.  Otherwise all of FB' revenue is from advertising, which I think has already reached a saturation point.  Facebook has become little more that a platform for corporate Spam.  When these advertisers figure out that FB is not driving their profits higher, they will exit by the droves.  With this in mind I think FB will have a hard time providing any sort of value for stockholders.  The current crop of FB employees will get rich off this IPO and cash out before the end.  
Feb 1, 2012 10:54AM
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Why did he say that snarky thing about 'killing worker productivity in the office'?  I think a better metaphor would have been 'until Facebook proves they can make money as well as my hair is deserting my soon to be bald head.' 
Feb 1, 2012 11:30AM
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Do they care Moronic?  They've made billions.
Feb 1, 2012 11:29AM
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They are hiding more than their level of profits, a ticket symbol isn't even available.  These are usually public knowledge before the IPO.
May 3, 2012 7:42PM
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I think it will be the biggest disaster of all time.
Its value is as a big database that can be mined.
As a database it is aging, flawed, out of date, out of fashion, flawed, duplicated, without integrity, unverifiable, fake, has no true unique identifier. etc etc etc.

As a database its stuffed.
So as a business its stuffed!

Feb 1, 2012 11:50AM
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well im not jumping right in , I figure a 6week run and then you can buy at a reasonable price,but buying and selling 2hours later might work.
Feb 1, 2012 11:35AM
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18 months max before the next internet bubble!  which makes sense, because taht will be approx. 5 years since the last "correction."
Feb 1, 2012 11:05AM
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If FB has any brains at all they will stay as far away from this deal as they can.. Why they will become just another big coroporation out there to hurt and rip people off. and FB once you start acting like they do on wall street you can bet your company will go down the tubes as fast as melted ice cream through a straw.   THIS = BIG COMAPNY BIG COROPORATION  it is them who could careless about people and run based on greedy as money hugry grubby stock owners. Then they to will be right up there with OBAMA  b.s.  probalby why they  are doing it,   BIG MISTAKE FB I step as far away from that b.s. as I COULD dont  do it you;ll be sorry. 
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Let me see payroll gains for December downwardly revised. ADP had a lot of new customers because of the uncertainly of how to handle the tax cuts for normal workers so a lot of mom and pop stores bit the bullet and signed up increasing the ADP numbers.

Pretty much as the Fed still has interest rates at zero until 2014 the US economy is dead. We are still in a Death Spiral of lost jobs and an ever weaker and weaker economy. Note : has the housing market taken off because we are seeing 350,000 new jobs paying $100,000 a year no we are still seeing a decline in the total workforce and a decline in the average wage (after you take out the top 10 percent where the wage growth is).

And this Facebook IPO is going to be the high water mark because the market is going to tank later this year.

Wednesday is heavy on U.S. economic data, starting with a new report on the job market from payroll processing firm Automatic Data Processing. Companies added 170,000 new jobs in January, according to ADP, falling short of estimates for 185,000  from Thomson Reuters. December payrolls were downwardly revised to 292,000 from 325,000. Monthly gains in employment have averaged 223,000 over the last three months, suggesting that the jobs recovery remains anemic.
Feb 1, 2012 11:18AM
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ditto tv wrote a blog about that. If you want to read it, find it on http://www.ditto.tv/blog/2012/02/ditto-is-looking-over-its-s​houlder/ 
Feb 1, 2012 11:40AM
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Anyone know any age dating site can be better ?
age is nothing but just a number.My husband and me both think so ,He is almost 10year older than me .i met him via~~--Age'LessM​ing​​​​​​​​​​​le .COM~~ a nice place for younger women and oldermen, or older women and younger men, to interact with each other,maybe you wanna check it out or tell your friends...i saw the ads on tv , i love it !
=== Let me see payroll gains for December downwardly revised. ADP had a lot of new customers because of the uncertainly of how to handle the tax cuts for normal workers so a lot of mom and pop stores bit the bullet and signed up increasing the ADP numbers.
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