Why I will shun investing in Facebook

Facebook has been mulling going public and it is not new news. It will trade under the ticker symbol “FB” in NASDAQ. Rumours are flying around that it will list on May 17th 2012. Though Facebook going public is akin to the unveiling of a new iPhone, I’m not buying into the hype nor will I be buying into the company.

Just like how Warren Buffett shuns companies that are not predictable, I will keep Facebook at a 10-foot pole’s distance (I meant investing in Facebook at a 10-foot pole’s distance). Yes, I do have a Facebook account and sit religiously in front of my screen everyday without fail checking on where the latest MRT breakdown is but investing is a different ball game altogether. Facebook’s business is not predictable unlike that of Coca-Cola or Procter & Gamble. I can safely say that people will still drink Coke 20 to 30 years from now just like how people have been drinking Coke for the past 100 odd years. Men will still shave many years into the future just like how they have been shaving since the start of human race (well, I have to admit at this point that I don’t really know if men shaved at the beginning of time) and Gillette is a company owned by Procter & Gamble. Warren Buffett has this to say about Gillette: “It’s pleasant to go to bed every night, knowing there are 2.5 billion males in the world who will have to shave in the morning”. How many of us can safely say that Facebook will be around 20 to 30 years into the future? How about 10 to 20 years? Heck, what about 5 to 10 years? I cannot even safely say if Facebook will still be indomitable in the next three to five years. Friendster crumbled from the advent of Facebook. Friendster was formed in 2002  and it took the world by storm. “Bribing” your friends to write a testimonial for you was common. In 2009, however, the site suffered an exponential decline in traffic in America, according to Alexa. Within seven years, Friendster was almost non-existent. Facebook was launched in 2004 and it is in its eighth year currently. Facebook is still doing extremely well in the social space. However, Google is slowly gaining grounds with Google+ and Microsoft and Twitter are huge competitors too.

Another reason why I will keep investing in Facebook at a 10-foot pole’s distance is because the management has no plans on how to use the IPO proceeds! Looking at the latest IPO prospectus dated 23rd April 2012 under “Use of Proceeds”, it says “we do not currently have any specific uses of the net proceeds planned” and “we have no commitments to use the proceeds from this offering for any such acquisitions or investments at this time”. The main reason companies go public is to raise funds to fuel their business further.  There may be secondary reasons why a company would want to go public though. If a company has no clue on how it is going to use the funds, why decide to go public in the first place? Looking at the balance sheet, long-term debt is nil and thus, Facebook does not need the IPO proceeds to pare down any debt. One of the reasons Facebook is going public may be to gain a better footing in the technology industry by getting more eyeballs. Another reason to ponder: is the management trying to cash-out?

Having said all the above, Facebook actually has a moat around itself that can help to fend off competitors for a while. It has a huge network effect and the more users it has, the more people use. It becomes a virtuous circle. Facebook’s moat is similar to those of eBay’s, Visa’s and MasterCard’s. Facebook also has high barriers to entry. Tons of money have been invested for the servers, research and development and what not. It will take a considerable effort for a competitor to shrug off the behemoth Facebook off its lead. However, competitors like Google are hot on the heels of Facebook. Google+ was launched in June 2011 and is less than a year old compared to Facebook’s eight years. Give Google+ a few more years and I think it might nudge Facebook off the pole position. Other competitors, as stated above, include Twitter and Microsoft.

In conclusion, I will not invest in Facebook due to the unpredictability of the business and due to cluelessness of the management on how to use the IPO proceeds. But, I will still continue to embrace Facebook as a netizen and still stalk on my friends’ profiles. Now, off to share this blog post on my Facebook wall…

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11 thoughts on “Why I will shun investing in Facebook

  1. I always shun social network and media company like you. Unless I know it will still be there for 10 to 20 year espcially if they are irrecplace yet and with good magnement.

  2. I hold a slightly different view point from you though I will still shun it due to the price.

    The network effect of Facebook is too strong to be conquered with more than 900 million active user base (out of total 2 billion of internet user worldwide). For competitor to force you to switch, not only do they have to convince you, they have to move all your friends there as well. And to convince all your friends, the friends of your friends have to move too.

    As the network effect is strong, there is simply no way competitor can take away the pie. What’s more Facebook is free to use and register, there’s 0 price competition involved.

    The only possibility lies in it becoming obsolete which is something totally different comes up which make it useless. Not Google + definitely. Facebook already encompasses social interaction with its game, chat, walls and photos. It is really hard to come up with something much better.

    As for the management cashing out, Mark Zuckerberg is not going to do so. He founded the company and after IPO he will still retain the control. The one who’s selling out are all the Private Equity and his employees who owns the stock. So long as Zuckerberg does not sell out, this will not be of a concern. A number of investors have volunteered to sell their voting right of the share to Zuckerberg for a mere $1, this is a proof of him trying to control the company though this is a risk by itself.

    They have also start to utilize their cash as they pay $1billion for Instangram. Cash is needed for technology companies to buy new tech firm to boost their product offering.

    The real concern should now be as follow:

    1)How well is Facebook going to integrate advertising in its web and mobile version to derive maximum revenue?
    2)Is Facebook able to open another source of revenue other than advertising and gaming dollar from its large user base?
    3)How can competitor destroy Facebook? What new features and excitement are needed to convince you to switch over despite the high switching cost(all your friends)?

    • Hi shanrui,

      Thanks for your comments!

      I agree that the network effect for Facebook is strong. The network effect for Friendster was strong as well. However, Friendster didn’t have games and apps unlike Facebook. This caused Friendster to be fried. Facebook could easily muscle Friendster away by using advertising and games. I switched over to Facebook from Friendster in late 2007/early 2008 after convincing from a few friends. I think it wouldn’t be that easy to switch to another competitor from Facebook but it is possible if there’s better offerings from a competitor. The novelty factor will die off one day. The question is just when?

      I mentioned Google+ as a competition as Google has a wider reach compared to Facebook. Facebook is just a social media site but Google is something bigger. Google+ can leverage on this. Google+ can integrate all the other services offered by Google into its Google+ service. Google has a phone but Facebook doesn’t. Google has maps but Facebook doesn’t. There are so many examples. Thus, from such examples, it can be seen that Google has bigger muscle strength than Facebook. Off my head, I think advertising wise, Google is much bigger too.

      You mentioned that cash is needed for tech companies to upgrade itself. This is precisely the point why technology companies are unpredictable. If you don’t innovate, you become obsolete. This is the risk of investing in tech companies and I think that’s why Warren Buffett doesn’t like tech companies, even though he went into IBM recently. That’s another story though.

      • I do agree on the unpredictability of tech company as the barrier of entry is nearly 0 when it comes to creating disruptive technology. The web allows them to quickly secure customers while PE and VC love to fund them. Even if the success rate is 1/1000, there will be 10,000 people hoping to become the next larry page, bill gates, steve job or mark zuckerberg.

        however, there are instances of tech company who has generated a strong moat to maintain their position in their field for a long long time through an addition of non-tech moat. Amazon created an eco-system around it and has a wonderful supply chain. Microsoft also created an eco-system with the chip and pcs manufacturers to maintain its 90% Window market share till today.

        Its not entirely impossible, the key is to have multiple moats – one that is non-tech moat.

      • Hi shanrui,

        You hit the nail there! Microsoft has wide moat due to its high switching costs. People using Microsoft Office or Windows need access to those softwares to use them in another computer. The moat is just like Adobe’s. Amazon has moat due to the supply chain like you said. Comparing Facebook to Microsoft and Adobe, Facebook loses in my opinion.

  3. We all should remember that facebook is not only a great networking site for individuals like you and me, but also a great domain where many businesses use to reach customers. Nowadays, you can login to many sites using fb login only and need not register separately for their services. Google is also targeting this element. Twitter is also comparable in this aspect. So in my opinion, as long the management of fb is sound, it could be a safe short-term investment potential. I park my money on social sites on the long run though.

    • Hi Siva,

      Thanks for your input.

      Yes, for a short-term trade based on market sentiments, it might be ok like you said. But for long-term wise (the focus of the article), it’s not really worthy of investment, same as what you have mentioned.

      Cheers!
      FFN

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