It’s Not Ford Tough
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.
Filed under: Current Events, Technology on May 15th, 2012
danajohnhill
danajohnhill
danajohnhill
danajohnhill
danajohnhill
A well-written post Dana, but I heartily and vehemently disagree.
Just because someone or something doesn’t “make” an tangible object, doesn’t that mean that company is worthless or any less valuable than a company that does. Look at Gainesville. Very few people in the city work for a company or industry that manufactures products. In fact, I would go as far as to say that there are three types of jobs one can get in this city: a job with the University, a job with one of the many hospitals, or a job working for company that supplies the needs of the people working for the University or the hospitals. All three categories are service jobs.
At the Radio station, do you actually “make” anything? No, you provide a service to people. Certainly, creativity is involved; I’m not trying to bash your job here. But nothing is being tangibly “made” in the process.
Same with my job. I (and the people I work for) don’t actually make anything. We go out and provide computing assistance and service to those within the college.
If you look at the ten highest revenue-producing companies in the world, eight of them are energy companies. They don’t actually “make” anything. They drill it out of the ground. Sure, there is some refinement involved, but I’d be willing to bet most of their profit margin comes from being able to drill large amounts out of the ground, taking advantage of economies of scale.
Additionally, value is not what someone “feels.” You may not like that Facebook may be “worth” more than Ford or McDonalds, but that very well may be the case. The services someone receives from Facebook exceed anything they receive from either of those two companies. For one, while everyone uses Facebook, not everyone buys a Toyota, so right there Facebook has the advantage. And while almost everyone has eaten at McDonalds (Billions and Billions Served), is one or two Big Macs a week really worth more than the hours the users spend on Facebook? I think not. Plus, if we can put a price one one’s time, Facebook does in seconds what used to take hours, freeing people up to pursue other activities that they enjoy. Opportunity costs are practically zero.
You compare Friendster and MySpace to Facebook, and while all three are social networking sites, there are marked differences between each. The key is that while Facebook was able to evolve with its users, MySpace and Friendster, thanks in part to decisions made by management and others, did not. Zuckerberg may be totalitarian when it comes to information gathering, but the man got where he is thanks to his ability to anticipate and adjust. Additionally, all three sites emerged within years of each other (Friendster in 2002, MySpace in 2003, and Facebook in 2004), but only Facebook has stood the test of time.
Is Zuckerberg infallible? Certainly not. But look at Steve Jobs. Just when the world thought he was done, he came back stronger and better than ever.
You may bemoan the end of the age of manufacturing, when someone could work fifty years for a company, retire, and have a nice pension, but that is not the way of the world anymore. Very few people have “careers” to speak of; just a series of jobs. America is, for better or for worse, a service economy now, and Facebook is on the cutting edge.
Stock price in itself doesn’t equal the value of the company since the total number of shares in the market can be radically different company to company. The market cap of Facebook is expected to be approximately 100 billion at the start of this sale (stock price multiplied by number of shares total) but they won’t bring in 100 billion in cash since they are only selling a small portion 10-15% on the open market.
I don’t believe Facebook’s market cap of 100 billion is anywhere near deserved with Ford currently sitting at 40 billion and Coca Cola at 175 billion. Even the big wigs like Google (200 billion), ExxonMobile (385 billion), and Apple (510 billion) seem leaps and bounds more established to warrant such a valuation.
You are right, Anthony, that Facebook is a useful tool that many millions derive value from (except you, for some reason). I don’t deny that. What I doubt is Facebook’s long-term ability to monitize (is that the right word?) that.
Moreover, I doubt, too, that Facebook will continue the susbstantial growth necessary to maintain a high stock price.
Meanwhile, you are right about Gainesville having a service-oriented economy. Service economies are fine where you have a highly-educated and/or highly-skilled population. Banking, creative services (including radio), technology services (like Facebook), medical services, law enforcement, and many others are all essential parts of the American economy that I do not put down. But many other service jobs, in fields like retail and food services, seldom pay enough to provide a decent standard of living, and certainly not opportunities to raise one’s standard of living. I bemoan the decline (not end) of American manufacturing not because of romantic or nostalgic notions of past American glory, but because I think manufacturing affords less educated workers the opportunity to make a decent living. Imagine if the one factory in China that makes iPads and iPhones were to relocate to, say, Detroit. Detroit would, in an instant, experience a reversal of fortunes. I know that’s just wishful thinking, but I think it’s worth asking why so many people seem okay with with low-skilled manufacturing jobs going overseas.
As for Facebook, time will tell if I am right or wrong. I readily admit that I have no special business or computer training, and I certainly don’t claim to know what wonderous things the future holds. But let’s put it this way: if I had money, I wouldn’t be holding onto Facebook stock.
I’ll follow up on this story in the years ahead, and we’ll see where it goes.
Thank you, Chris, for pointing out the number of shares issue. I clearly do not know a lot about business.
Dana,
Solid points; I probably should have been more clear and a bit less scathing in my critique. My apologies.
Ultimately, you are right on at least one account: Facebook is probably not worth $40 a share. There are three reasons to purchase a stock: ownership in the company, receiving dividends, and gambling that the stock price will go up. Zuckerburg still has a controlling interest in the company – over 50% of the stock (through himself and intermediaries), and Facebook to this point is not paying dividends. So the only reason to long Facebook is to hope the price will go up. It’s a gamble, and one that may not work to the investors’ favor.
In related news:
http://www.redstate.com/smoovjc/2012/05/27/facebook-investors-need-to-suck-it-up/
I read about that, Dad. Fools and their money are soon parted.