The Principle's Still the Problem for Facebook
It's been a big week for the Facebook nation. Little Lord Zuckerberg can afford a whole stack of hoodies now, and he had two big Life Events to add to his timeline: listing Facebook (NAS: FB) on the Nasdaq, and getting married in his backyard. (Good call, Mr. Zuckerberg. Renting out a Greek island for your nuptials probably wouldn't have looked too good for a newly public company's public relations. But let's not talk about the theories that the timing was perfect for shielding assets from communal property laws.)
I made it clear in February that I wasn't into the Facebook IPO, and that was before even glancing at valuation. Most of my negativity hinged on shareholder rights issues. Fast-forward to today, and the hype over this IPO could be deemed one of the most embarrassing moments in stock market history. And, in my opinion, the principle is still the problem.
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Corporate governance issues aside, Facebook's overly hyped IPO ended up looking even worse for individual investors eager to buy in, given the myriad issues in the last crazy week.
My colleague Eric Bleeker describes the tragedy in depth, but here's the short version. Reportedly analysts from Facebook's underwriters reduced their revenue estimates during Facebook's IPO dog-and-pony-show (whoops, road show) and then shared that information only with some clients -- the kind of selective disclosure we all know is, at best, extremely unethical and at worst, illegal. Worse, analysts reportedly adjusted their estimates because Facebook executives instructed them to do so.
Obviously, this didn't set Facebook apart from the ugly shenanigans-business-as-usual behavior on Wall Street. It also struck me as particularly pathetic because Zuckerberg talked a good and lofty game in his letter in Facebook's IPO filing:
Facebook aspires to build the services that give people the power to share and help them once again transform many of our core institutions and industries... We believe building tools to help people share can bring a more honest and transparent dialogue around government that could lead to more direct empowerment of people, more accountability for officials and better solutions to some of the biggest problems of our time.
By giving people the power to share, we are starting to see people make their voices heard on a different scale from what has historically been possible. These voices will increase in number and volume. They cannot be ignored. Over time, we expect governments will become more responsive to issues and concerns raised directly by all their people rather than through intermediaries controlled by a select few. [emphasis added]
Well, the IPO process and controversy certainly reminded us about "intermediaries controlled by a select few."
Why didn't Facebook do what Google (NAS: GOOG) did, and go public via the Dutch auction process? As longtime Fool Bill Mann said of Google's Dutch auction plan in 2004, "It's a pretty neat approach that completely takes the judgment of investment bankers out of the pricing decision and places it in the hands of the market... A Dutch auction curtails or removes the ability of the investment bank to influence the opening price of the shares and its ability to allocate IPO shares at all. It's share democracy at its finest."
The Facebook IPO sadly reminded us not only that Wall Street's still pretty icky, but also that Facebook's supposed membership in the ranks of Internet companies that democratize information and level the playing field for regular people simply didn't apply to the IPO process in the least.
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Granted, the fact that Facebook shares didn't double or triple right out of the gate is a good, sane thing; IPO stock pops are usually speculative and extremely removed from sanity.
Still, I remain bearish about the stock even without any crazy pop. I've heard the argument floating around that Facebook doesn't really have a product. It has created a platform, but in reality, I'd argue if there's any product, it's people: you, me, and all our friends and family. We share our brilliant witticisms, amazing photos, life achievements, and sometimes the very fabric and complexity of our lives within Facebook's virtual stage.
The fact that Mark Zuckerberg & Co. have occasionally played a little fast and loose when it comes to respecting the gravity of that social contract in terms of privacy is a salient point (and risk), too.
Obviously, many Internet companies make money through our online lives, habits, and things we're desperately searching for, but social media takes it to a whole new level due to the personal nature of it all (what's on your mind?). I call that risky business.
Price and principle
Last but not least, despite the fact that it didn't triple right out of the gate, Facebook still isn't a cheap stock.
And as always, the individual investor had best take the tried-and-true caveat emptor approach to hot, hyped IPOs (which, of course, shouldn't be a new lesson). Facebook's trading at 50 times forward earnings. Gosh... mature, powerful, tech heavyweights Google and Apple (NAS: AAPL) are both far cheaper than that, trading at 12 and 10 times forward earnings, respectively.
Amazon.com's (NAS: AMZN) trading at a richer premium (a freaky 85 times forward earnings), but we already know about its revenue streams and amazing track record of growing customer loyalty and sales. Facebook still has a heck of a lot to prove when it comes to monetizing its business.
I know some Facebook investors disagree with me. My colleagues John Reeves and David Meier have decided to buy Facebook for their real-money 10-bagger stocks portfolio. A few of my friends have also mentioned purchasing Facebook shares, and I was glad to hear in all cases their reasoning was hinged on the long haul, not the quick buck.
But I'm still more than perfectly content sitting this one out. There are just far too many things about Facebook that I don't feel comfortable with. In many of these elements, the principle's the thing for me. What do you think? Let me know in the comments box below.
Believe it or not, Facebook isn't the only game in town. Check out our free report: "Forget Facebook -- Here's the Tech IPO You Should Be Buying."
Check back atFool.comevery Wednesday and Friday for Alyce Lomax's column on environmental, social, and governance issues.
At the time this article was published Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Amazon.com, Apple, and Google. Motley Fool newsletter services have recommended buying shares of Google, Apple, and Amazon.com, as well as creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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