Can I invest in Facebook Stock (FB) – How to Make Money off the IPO

‘Can I invest in Facebook?’ is a question you may have been asking yourself if you are part of the almost 1 billion users of the social media giant Facebook.  Although Facebook is not yet a public company the excitement over Mark Zuckerberg’s IPO filing last week is brewing.

The Facebook IPO will change the entire landscape of investing for young people. Now millions of twenty somethings will take an interest in investing and stocks.  Will there be enough shares of Facebook stock for us to buy? Will Facebook’s stock (FB ticker symbol) be affordable enough to buy? Let’s take a look at these questions and more before investing in Facebook.

Facebook

Facebook is Growing Faster by the Day and Approaching 1 Billion Users. Investing with Them Seems Like a No Brainer. Photo By Scott Beale

What is Facebook Worth?

In 2007 when Microsoft made their historic investment in Facebook the company was valued at $15 billion.  Think that sounds crazy? As of 2011 the value has jumped to over $84 billion due to the Goldman Sachs investment and many project the value to go over $100 billion when Facebook goes public.

The Facebook IPO will raise $5 billion for the company, considerably more than rival Google whose IPO raised $1.67 billion.

Twitter has been valued at only $10 billion in comparison.

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What are Facebook’s Assets?

Facebook has almost 1 billion users, more than any other social media.  According to Fool.com Facebook has 483 million daily users with 2.7 billion ‘likes’ per day. This makes for excellent advertising opportunities.

Let’s not forget what Facebook is. Facebook provides a social forum for its users not unlike the MySpace of the .com crash. Although the system has been improved upon and the metrics are slightly different Facebook along with other social media uses a similar model.

Facebook relies on users to use its template to remain in touch with their friends, family, coworkers, etc. through private messaging and public sharing.  Is any of this an exclusive asset? Not likely. Although other companies have thus far been unable to duplicate Facebook’s success, it is nevertheless able to be copied.

Most importantly Facebook has a brand and can easily branch out against competitors like Google or Yahoo and begin offering search and other functions from the IPO.

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How Does Facebook Make Money?

Although Facebook is free to use, 60% of its revenues come from advertisements.  The second highest revenue margin comes from credits on games and applications produced by other companies using Facebook as a platform at over 15% of revenue.  This is according to Trefis.com.

In addition, Trefis reports that revenues are expected to be at $3.8 billion. Using the metric of 1 billion users this works out to be about $3.80 per user in revenue. This assumes they will receive 1 billion users, which they are fast approaching.  Although this may not seem like much and certainly not much compared to the valuations it is quite impressive for a service that is ‘free.’ Any growth would be substantial.

As the second most visited website online, behind Google, Facebook has a lot of room to run and growth will be the greatest value of the company.

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Will Facebook Last? What about Facebook Security and Privacy Concerns?

Facebook is growing strong and analysts predict that such large valuations are actually quite conservative compared to the amount of revenue it is currently making and the growth in users and social media in general.  The value of Facebook could increase in multiples as well if it is able to branch out into other avenues, like a Google or Apple have. If prospects were that good I would be investing in Facebook.

built by the people...for FACEBOOK

Facebook is very convincing. They spend a lot of time and money reminding you and me how they are on our team and help us so much. Is it working on you? By Michael Porter

One difference I see is in general happiness with customers. Google has a relatively positive reputation among twenty something’s and most youth.  Facebook on the other hand has poor customer relations and is #1 of the top 10 most hated brands in the United States. Where does this all come from? Privacy issues.

CEO and co-founder Mark Zuckerberg has continued to disappoint users by sacrificing privacy for profit with each new update. The latest, Timeline has turned a rather sleek social media platform into a mess which eerily reminds of the layout on the once great MySpace.

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Christopher Soghoian, graduate fellow at the Center for Applied Cybersecurity Research at Indiana University sums it up perfectly:

“I think Facebook has a lot in common with cable companies, which is that no one likes using them.  People do not like Facebook. They don’t trust Facebook. They’re using them because they have to. Facebook gets people to give up information under the claim that it’s private and then it’s made public. And your only option is to shut down your account.”  - Source Wall Street Journal

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Soghoian also predicts that once people find something better to use, they will move on.  My analysis comes from much of the same camp. When evaluating Facebook and many other social media and .com companies the best analysis comes from their users, you and me, not Wall Street.

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5 Reasons Not to Invest in Facebook IPO

  1. Stock price will get high, really high, really fast – You might end up overpaying just to own a share.
  2. Do you think it is fair for a company to be worth $100 billion dollars because it sells your interests, birth date, location, work history, schools you have attended, etc.?
  3. How much more aggressive will they get when Wall Street demands further  earnings and growth?
  4. Who’s to say someone will not just as easily duplicate Facebook’s model?
  5. Other social media have gone public but are struggling such as Groupon, Zynga, Linkedin, etc.

5 Reasons to Invest in Facebook IPO

  1. Revenues are impressive and growth is still incredibly easy – Searching on Facebook and use of Facebook games are hot and growing
  2. Facebook has yet to branch out beyond its original business model – with an IPO at $5 billion that money could be used to expand heavily
  3. You use it all the time, do you think you will stop?
  4. Buying the IPO and selling soon after (next day or week) may net huge profits as everyone wants a piece
  5. Facebook could turn out to be a long term bet like Google and Apple of which many wish they bought at the IPO price – those who did are easily millionaires now

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Facebook is likely to have an amazing IPO, one that is highly anticipated with incredible media hype. They also might work out a PR deal with their Facebook users to encourage the sale of shares to them directly.and get ready for the IPO. It is going to be historic.

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