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Facebook stock value will hopefully succeed

By Srivats Satish
On February 16, 2012

Facebook has been one of the most transformative developments in social interaction since the creation of the mobile phone. Nearing in on a billion users, Facebook has affected almost every part of daily life in the 21st century. Just think about the sheer numbers of businesses, school clubs and social movement groups that have used Facebook to spread their messages and one can begin to understand the optimism that has surrounded the announcement of Facebook's IPO. The IPO, filed in early February will be primarily underwritten by Wall Street giant Morgan Stanley and will result in tradable shares being available sometime around May.

While Facebook is rumored to be valued between $75 billion and $100 billion, it will be a risky security for many. The key to determining whether Facebook will become as valuable as the market bulls say is to think about the challenges the company will start having to face. Much of Facebook's value is in its potential to more effectively monetize itself.

For example, Facebook stated in its S-1 filing that its mobile app is a new avenue for advertising revenue for around 300 million active users monthly. The company also noted the surge in revenues in app purchases, in games like "Farmville." It said the company will help balance out the additional advertising that may become necessary for Facebook as it becomes publicly traded. The "Like" button featured on many popular websites, news sites and game sites has also helped to bring in additional revenue. Investors optimistic about Facebook cite possibilities for sustained, albeit slower, growth to drive in additional profits for years to come. Also, the difficulty of switching social networks – given the amount of time the average user puts into cultivating a profile, it is very likely that Facebook will be –around for a long time to come. 

However, despite my net optimism about the long-term viability of the stock, I am cautious and believe that investors should only allocate risk capital for a purchase of Facebook stock in the short run. First off, despite Facebook's potential for the future, the most off-putting fact about the stock is the estimated price-to-earnings ratio of nearly a 100 given a $100 billion valuation. This makes the stock incredibly expensive compared to the dirt-cheap prices of nearly every other tech type stock out there, such as an Apple or a Yahoo. Facebook stated in its S-1 that the company faces significant competition in almost every aspect of their business. There are few barriers to prevent another college whiz kid from creating a website to rival Facebook, and although unlikely, doesn't seem too far-fetched considering the fast rises and precipitous declines of sites such as Friendster or Myspace. All it takes is an easy process of transition. Facebook has an achilles heel in terms of privacy and the monetization of user information, user concerns that were hardly mentioned within their S-1.

Furthermore, Facebook rivals such as Google (trading around 20 times earnings) and Microsoft (trading around 11 times earnings) are much safer and cheaper investments. Depending on the state  of the economy in May, and other factors such as the European debt crisis, Facebook's stock might be extremely volatile from the get-go. In its S-1, Facebook reveals that founder and CEO Mark Zuckerberg will retain nearly 57 percent of voting power, which some may interpret as a plus or a negative.

Zuckerberg seems to have been forced to go public with a company he tried hard to keep private. Given the level of voting power he retains, he may not be as likely to take Facebook in a direction that will soothe shareholder concerns through short-term gain. Instead, he might try to move his creation in a direction that appeals to his own sense of "success" that might not necessarily be based on monetary terms.

Although I feel that Facebook's stock will trend upward in the long run through a combination of an increase in users, increase in advertising and selling of private information to advertisers to a greater extent, the stock will be much too risky to purchase early on. The uncertain economy and the uncertain nature of Facebook's intrinsic value makes it a risky stock that certainly cannot be considered the best investment for this upcoming year.  


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