The cool thing to do in the business world, the finance world, the traditional media world, and the blogosphere is to bash today’s Facebook IPO. Everything I read is either a warning about the dangers of investing or a list of reasons why you should not invest. I have read personal attacks on Zuckerberg and rather scathing criticisms of the company itself. It has been alarming to be to see such a dearth of positive news about the company as the IPO (meaning “initial public offering,” for those of you who slept through your pre-req Econ and Finance classes) approached and thus, I have decided to take it upon myself to remind us all of some important points as we watch Facebook’s stock price rise and fall drastically over the next few days.
Note: This will be a glowingly positive article, but I assure you I am not in any way being compensated by Facebook, nor do I have a financial stake in the success of the company. I do have a few friends who work there, so I suppose the better the share price, the more drinks I may potentially receive at the bar tonight, but that’s the extent of it. After today, the company should have roughly $100 billion more to spend than they did yesterday, so if someone at Facebook wants to talk compensation or employment then please do not hesitate to get in touch with me. I can absolutely be bought.
I work in finance, my degree is in finance, and my religion makes me a card carrying member of a banking conspiracy so vast that most people can’t even fathom its reach or complexity. I am well aware of all the statistics about investing in IPOs. In general, it is a terrible idea to invest, as an individual, on the first day of an IPO. Benjamin Graham and Warren Buffett both say so and I trust their investment acumen more than anyone else. (Jim Cramer comes close specifically because he upgraded the Bluth Company from “Don't Buy” to “Risky.”)
The overwhelming majority of individual investors who buy an IPO out of the gate end up buying an over-hyped company at a massively inflated price and they end up losing money on the deal. I am not advocating for buying Facebook on Day 1. I am saying that there is one clear way to avoid being a company that never accelerates past its opening day pop: be a best of breed company. No one who invested in Google or Apple or Berkshire Hathaway early ever regretted it. If you believe a company is the best in its field and it has a large moat (sustainable competitive advantage) then an IPO becomes a much less risky investment. I believe Facebook has a large moat. I believe it is the best of breed. I believe that, unlike Groupon and some other IPO darlings, Facebook will be around and profitable for many, many years to come.
Let’s move on the fun stuff. I keep reading over and over again about how shady Facebook is as it sits there and collects our private information for its own profit with no regard for its users, completely dismissing the fact that every single piece of data on Facebook was voluntarily updated by its users. Facebook did not guess that I live in San Francisco or that I have a girlfriend (sorry ladies). Facebook certainly did not guess that my friend [redacted] shit his pants in high school. We TOLD Facebook this. Happily.
All Facebook did was give me a sleek, sexy platform to share this information. Then they made it so easy to use that my Grandma has an account. This platform is also completely free of charge, works 24/7 from anywhere in the world and without it I would never know which girls from college ended up getting implants as graduation gifts (the answer is surprisingly high).
The next time you hear someone railing against Facebook’s shitty privacy settings just tell them that there is one simple way to avoid all of this: don’t get an account. No one has ever forced anyone to get a Facebook account and if you are worried about how your personal information is going to be shared and sold then don’t give them any personal information. That’s so absurdly obvious that I can’t believe I even had to type it but I know many people who haven’t grasped this concept. In fairness though, I know many really dumb people. Some with great implants.
I get it. You saw The Social Network and you know Mark Zuckerberg is an asshole who back-stabbed his friend and can’t get a girl to save his life. Here are a few fun facts for you: he has had a girlfriend literally the entire time that Facebook has been around and the screenplay for that movie was based on a book where the author only interviewed Eduardo and the Winklevii but never heard Zuckerberg's side of the story (outside of court depositions). I know you feel bad because the movie told you that Spiderman got completely screwed out of what was rightfully his.
But did you know that Eduardo Saverin could walk away with a reported $3 billion post-IPO? Still feel bad? He also has renounced his citizenship in the United States allowing him to pay a small fraction of the taxes that he otherwise would have owed. He claims the move was not motivated by finances but the timing sure seems to say otherwise. I’m not saying he reaped the rewards of living in a country that values entrepreneurship and free markets so much that it allowed him to become a billionaire only so he could leave the second the country asked something in return from him, to give his fair share back so the system could continue on as it is supposed to. But I'm not NOT saying that either.
And what of those nice Winklevoss boys? They were so angry in the film! That nerd double-crossed them! Well for the privilege of not building this company, they will make a reported $300-500 million (combined, naturally). Maybe they came up with the idea and maybe they didn’t, but I assure you that very few people in the history of mankind have ever made $500 million simply for claiming that they had an idea first. Also, their initial idea was simply a way to make it easier for girls to try to date Harvard men more than it was a true all-encompassing social network. Plus, Harvard president Larry Summers called the Winklevii assholes.
The movie has become the main thing that people think about when they think about Mark Zuckerberg and this is grossly unfair. At the age of 28, he has built a company that has more customers (disguised as “users”) than any company in the history of the world. The guy seems genuinely motivated to make the world a more open place and to make his product as beneficial to the user as possible instead of being motivated by money or power. If more people in charge of massive corporations were motivated in a more generally altruistic way, this country would be a lot better off.
Facebook might have a bit of a bumpy road ahead of them. Much like someone who makes it big in college, they have to adjust in becoming a grown up. I apparently am in the overwhelming minority who are simply not that worried. Approximately 12% of the world’s population, about 845 million people, log on to Facebook every month. I can’t get 12% of my family to read my articles. Analysts are worried because Facebook made “only” $1 billion in revenues in the first quarter of 2012. They may be overlooking the fact that Facebook has more profit on the day of their IPO than Google had in revenue.
Analysts frequently cite the fact that Facebook has not learned how to monetize their mobile users, like it’s a cause for concern. I look at this in a glass half full way. How incredible is it that they have HALF of their users using Facebook on mobile devices and they haven’t been making ANY money from this? All of the $3.7 billion in revenue the company produced in 2011 came from only half of their users!
Just a few short years ago analysts, journalists and critics worried Facebook would have trouble monetizing at all. Now the company is a multi-billion dollar behemoth. I see no reason to believe that collective intelligence of some of the smartest engineers in the world, working with a man who has proven himself to be a supremely capable CEO, will figure out a way to monetize the other half of their users. When that day happens, look out: the possibility for Apple-esque blow-out quarters exists.
Now is a good time I should mention that I am in no way qualified or licensed to actually give investment advice. I also do not plan on buying Facebook shares on opening day (I probably will shortly thereafter, though). However, I would encourage people to look beyond the negative headlines and realize that this company does have the potential to be a stock market darling à la Google or Apple over the long haul.
Where else are you going to go to stalk your ex-girlfriends? Or make fun of the family pictures of the weird, religious kids from high school with their 14 kids? Justin Timberlake hopes you will come back to MySpace but we all know that you won’t. The next Facebook isn’t coming, thanks to the aforementioned moat. There won’t be another Google unless government intervention makes it happen. Their head start is too far to overcome; their dominance is utter. Some pundits see this as the beginning of the next tech bubble and they may be right. However, the collapse of the tech bubble left only the cream of the crop standing and I am positive that Facebook resembles Google and Amazon much more than Pets.com.
There are two ways that this will play out: a long-term fabulous success story or a relatively short-term spectacular blow up. Companies like Facebook rarely follow normal, boring trajectories. Microsoft may seem boring now, but if you had invested $5,000 in Microsoft in 1986 you would have roughly $1.7 million dollars today. That is not normal or boring. That is a ridiculous success story. So maybe 20 years from now you will be re-reading this article, marveling at my foresight as you check out pictures of me on Facebook sailing in St. Tropez with my best pals Blue Ivy Carter and Sasha and Malia Obama on a boat I purchased with my enormous wealth from putting my money where my mouth is. Or you will be looking at pictures of me on MySpace, homeless, passed out in a ditch because I lost everything buying stock in a company I over-valued while the world’s richest man, Justin Timberlake, throws pennies at me. But I sit here on the day of the world’s most-hyped IPO and proudly proclaim myself bullish on Facebook. Bet I'm right.