Saturday, May 19, 2012

Facebook IPO

Here is what I think of the Facebook IPO (initial public offering) on the New York Stock Exchange. Last Friday it managed to a become a US$100bil company in capitalization.

I think this is the dotcom boom all over again. All the financial experts have gone crazy. I think very soon many people will wake up to see a big drop in the share price. Here's why.

1. On the first day of offering (last Friday), the share price would have dropped from $38 down to $32, if Morgan Stanley had not stepped in the prop it up. (re PCMag)

2. At $38 per share, it is more than 100 times its profit. In comparison, Google's share is 18 times and Apple's share is 13 times (re: ABC News). If this extends to Apple, Apple's share is a steal. So where is the rule of thumb for earnings-per-share? Or has all the bonker bankers lost their thumbs when they got their fingers burnt in the last dot-com bust?

3. What is the value of Facebook's tangible assets? Surely it cannot be anything close to $100bil! Is its intellectual property worth that much? No. Has it a proven track record of profits to justify its share price? No. At $100bil it is valued at more than McDonald's. I can literally see a lot more underlying assetss in McDonald's than in Facebook.

Facebook is a fad. Fads can quickly pass away. Just like many once-popular hot software products. Some are now lost from public memory while others have been humbled and replaced by better or cheaper alternatives. Facebook uses a devious means of building up the user base. It blatantly plays on the public's emotions to create a network of "Friends" around every user. Then when you want to call it quits, it "... makes a blatant appeal to your emotions. You're not deactivating your account, you're deactivating your friendships!" (quote from PC World). I believe in time people will get fed up of this and will spend less time on Facebook. That's when advertising revenue will drop and Facebook's profitablity will drop accordingly.

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