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…