Facebook IPO Predictions:

As Facebook rolls out the most highly anticipated IPO in recent memory, the internet has been buzzing with interest, and for good reason.  Current valuations are predicting the IPO may come in at more than $100 billion.  But before we begin looking at my prediction for the success of the stock itself, it is important to understand the timing of the IPO. The timing is an integral part of the story, one that has not gotten much press until recently, lets find out why:

“The 500 Rule”:

In 1934 the Securities and Exchange Act, known as the “500 rule” would be created.  The creation of this rule meant that once a company accrues greater than 500 investors it is then legally obligated to begin releasing its quarterly financial information, which is in fact the same requirement for publicly held companies. As the first quarter of 2012 began approaching Facebook began to see that their investor number might cross the 500 investor threshold.  In order to beat out the reporting obligations caused by the SEC’s “500 rule,” Facebook has elected to go ahead and go public. But why is this important?

Motivation:

When any company goes public it is always important to look at motivation.  Some firms do it because it is a money-raising venture that allows them to elevate their status within the business world in order to be on par with some of the “big boys.” Going public also allows companies to more easily attract and retain employees with stock and option incentives as well as providing shareholders with increased liquidity.  Facebook however, has needed none of these things.

Right now Facebook’s primary clientele are the millions of people worldwide who are glued to the status updates, wall posts, and games that are found within Facebook, and that will soon all change. As soon as the first stock is sold this clientele shifts away from the users and becomes the stockholders. It will be the stockholders, not the users, who will be the primary concern of this soon-to-be public company.

The Company That’s Not a Company:

Facebook is not a company, rather at its inception it wasn’t meant to become one. It was created as a service, and as Hollywood has illustrated in “The Social Network,” it was a service that quickly ballooned into the superpower that it is today. Facebook is a wonderful program, but I don’t believe that it is by any means the perfect business model.  There is a great war that has been brewing, hidden beneath the friend requests and the timelines, a war that I believe will not be fully understood until months from now.  It is the war between the user and the advertisers. Take a close look at the incentives that motivate both Facebook users and advertisers.  Advertising clients love Facebook for their uncanny ability to match their ads with the most relevant users, maximizing the exposure to their products and pushing users to their websites.  As for the users, well, we are the ones that give the advertisers the power, we are the ones fueling the great advertisement costs with every click, and we are the fickle consumers who can leave companies who fail to satisfy in the dust.  The problem is that with the IPO comes a new allegiance that Facebook will have to the shareholders, one promising growth, and continuous growth. With this focus on satisfying shareholders the actual Facebook users may be left in the dust.

The ‘friend request’ from Wall Street:

Technology stocks have always been on a bumpy road. In the 90s it was computer upstarts that ruled the emerging markets, in the 2000s all one had to do was add a ‘.com’ to their company name and they could make millions.  That is, until the bubble burst.  The problem with companies who only provide a service online is one that can be seen in Internet upstarts over the last four years.  Firstly, their value is very difficult to assess. Because they do not have extensive amounts of equity or assets their value is derived primarily from the business metrics collected online, which can be misleading.  This problem was first seen when Google was setting record numbers back when their income was primarily received with their pay-per-click (PPC) services, that is, before they branched out into more tangible industries.  The first few months went exceptionally until investors began to question how to derive a stock price for a company that didn’t create a product that you could hold in your hands.  The difficult valuation of internet stocks in only the first in a number of hurdles for Facebook, the matter of share holder returns will be the next issue.  Wall Street will demand steady returns for Facebook shareholders for years to come, which leads me to question, how?

The Social Networking Paradox

The problem with a company like Facebook being obligated to offer investors steady growth is that in order to do this they will need to employ additional cash streams into their business model.  It is this type of behavior that will push current Facebook users away from a more highly commercialized service towards less commercialized ‘pure’ social networking sites.  Imagine for example, if Facebook began to include pop-up advertising to meet the quarterly revenue demands of a less than financially impressive quarter.  The backlash would be insatiable. Shareholders would be happy that their numbers were met, but users may begin to look to additional social networking sites, perhaps even giving Google+ a chance.  It may seem like a stretch, but lets not forget about Myspace and Friendster going the way of the Dinosaurs simply because users felt the interface was becoming antiquated, bogged-down, and commercialized.

The Stock that was never meant to be

And after all of the above reasons that I believe is pointing towards a shaky future for the stock, it all comes down to this. I believe that Facebook’s stock will ultimately be a bad investment.  Social networking was never created to satisfy shareholders, it was created to bring people together. Sure I believe, just as everyone believes, that it will be a big hit right away, and for good reason.  After the mediocre performance of both Pandora and LinkedIn’s IPOs the public is excited for such a thriving company to put their hat in the ring. But months down the road, the novelty will wear off, the glamor will fade, and people will be left with a stock that simply will not hold the test of time.