Facebook IPO: Face the Music or Musical Chairs?

With the financial world all in a lather over the possibility of a Facebook IPO s-1 filing this week, it’s become commonplace to wonder what it all means.  Everyone has a Facebook account it seems.  For a business, is a Facebook and Twitter profile as important in 2012 as a website was in 2000?   Is liking a business on Facebook the same as that business having a domain name for people to search for?  Is it better?  There are no upfront costs like a website but unlike a good website the maintenance costs are the same without much of the personality.  A Facebook page is a Facebook page.  Facebook is the brand being promoted not your business.  How does one value Facebook’s stock price?

I ask these questions now because the Facebook IPO is one of those potential watershed events.  It’s put up or shut up time for their business model.  Potentially, this is a $100 billion deal that could turn to ash when the music stops and people realize that Facebook isn’t having a synergistic effect with other industries, but is rather its own corner of the internet.  But, if reports about the IPO price are accurate, and with the Facebook stock price on the secondary market giving them credence, then trading at a price to sales of nearly 20 is suicide for investors.  Apple’s is 3.3 and Google’s is 5.  When you already reach 1/7th of the population of the planet how much more room for growth can there really be?

Do farmers in Tanzania really need a smartphone and a Facebook profile?

There is likely to be a mild profit over the IPO valuation as the frenzy of the IPO itself will push the shares up while the company settles into its new structure, trims costs, excises pet projects and pushes its P/E down over the next few years.

What’s important to remember is that Facebook is the current iteration of social media.  Myspace was the last.  It’s dead.  Facebook killed it.  It was better.  Is there another one on the horizon?  Google+ would certainly like to think it is.  Or is net 3.0 waiting in the wings.  Facebook is two levels removed from the infrastructure of the internet it seeks to be the dominant player in and as such are vulnerable to the whims of the market.  The biggest threat to the Facebook stock price over time is the next Mark Zuckerberg himself.

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Tom Luongo

About Tom Luongo

Tom Luongo is a professional chemist and self-taught economist who has been following and trading stocks for nearly 12 years. He has no formal ties to the financial industry and considers that an asset in his analysis of the interplay between monetary policy and capital markets.

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