Allow me to offer some free, unbiased financial advice. Do not buy stock in Facebook. Actually, allow me to qualify my statement, and offer some explanation. If you can buy Facebook stock on Friday when it goes public, go ahead. If you can buy enough of it you will make a fortune. But if you cannot get it when it goes on sale, forget it.
For the record, I use Facebook. I find it a convenient way to stay in touch with a small group friends and family, some of whom live in far away places. I may see most of these people in person on a regular basis, but some I cannot, and Facebook makes staying in touch much easier. I have frequently noted that I graduated high school just before the internet became the ubiquitous entity it is today, and, in spite of my best intentions, within a year or two of graduation, I found it impossible to keep tabs on the many friends whose company I enjoyed, but who had moved away to attend college or see the world. I wasn’t able to exchange email addresses with my classmates, and none of them knew at the time what their telephone numbers would be for the next six months, let alone six years. (Remember, too, that, at that time, almost no one had a mobile phone, and even those who did had to get a new number each time they moved.) Facebook, for better or for worse, has made it possible to keep up with the lives of the people you care about, even if you cannot be near them.
Facebook reportedly has nearly a billion active users worldwide, with revenue, mostly from advertising, at over $3 billion per year. When its stock goes public on Friday—at an initial price of nearly $40 per share—it is expected to bring in more than $100 billion, and make its CEO one of the richest men on earth.
But let us put this in perspective. The Coca-Cola Company, in business since 1892, sells well over a billion drinks every day. It earns tens of billions of dollars each year in revenue and employs well over a hundred thousand people. There is a Coke bottling plant in my town. The Ford Motor Company, in business since 1903, is the world’s fifth largest auto maker, selling millions of vehicles each year in the United States alone. Its net profit in 2011 was over $6.5 billion. Ford employs over two hundred thousand people not including the many thousands who work at Ford dealerships across the country, selling and servicing the vehicles. As I write this, Ford stock is trading at $10.28 per share; Coke is trading at $62.46 per share.
By the end of trading on Friday, who knows where Facebook’s stock will be trading? Maybe $75 per share. Perhaps $100. It will certainly be trading higher than Ford, but may trade higher than Coca-Cola, or even McDonald’s. It will be trading higher than Microsoft, the company that makes the software that a vast majority of Facebook users use to access the site. This defies reason. Facebook may have millions of users; it may be hugely popular; it may be open in your internet browser right now, but Facebook is not worth more than Ford, or Coke, or McDonald’s.
I am not saying Facebook is not a valuable brand. Obviously, with so many users, the potential for ad revenue is substantial. But the internet is an entity even more mysterious than the stock market, and history has shown us that investor enthusiasm for internet companies has a tremendously costly downside. America Online was once the most-used internet service provider in the United States. Its name was practically synonymous with “internet”. It became so large that it was able to buy Time Warner, the company that owns half of the entertainment you consume each year. A decade after the AOL/Time Warner merger, AOL had a net revenue of -$700 million per year.
I don’t know if I believe that Facebook will someday crash as spectacularly as AOL did, but I don’t believe it will be the final social networking site on the internet, and I don’t believe it will worth much ten years from now. Amazon.com is one of the few websites that survived the dot com bubble of the early 2000s and came out stronger. But Amazon actually sells things. Lots of things. So does Ford. So does Coke. Facebook doesn’t. In fact, if Facebook tried to sell its service, tens of millions of people would immediately stop using it. Likewise, the advertising that supports the site can only become so pervasive before users resent it and flee to some other, perhaps yet-to-be-developed service. This may already be happening. Ask yourself how Facebook, whose revenue is dependent on advertising, could become worth more than the Time Warner Company (trading today at $35 per share), which owns Time Warner Cable, and at least ten cable television channels, all of which are bursting with advertising. It doesn’t make sense. And when you consider how readily users abandoned Friendster and MySpace, the future doesn’t look bright for Facebook.
So, consider my warning: Unless you can buy Facebook stock when it goes on sale on Friday—and quickly dump it—don’t buy it at all, because I don’t see any way that, ten years from now, Facebook’s stock price will be anywhere near where it closes on Friday afternoon. And however popular it is today, no serious person could believe that Facebook will be around as long as Ford or Coke.