#BlameJD – JD_2020's Blog!

When I heard Facebook would IPO around $30 – which in layman’s terms means each share of stock will cost only $30 initially – I started researching more about their IPO. I figured that, for the first time in a long time, I could buy a substantial position in a stock at a great price, for a company I think will eventually be trading in the hundreds of dollars range (like Google, and Apple). Meaning, I could potentially see a 10x return on my investment in a few short years.

After I started doing my homework, however, things started to get a little fishy…

For starters, What are some reasons that a company “goes public”?

• Raise capital.
• Improve the company’s public image.
• Attract better management and employees.
• Make the founders & investors wealthier….

Emphasis on that last bullet point.

I recalled back when they originally announced their IPO, Facebook stated they aimed to raise $5 Billion through the IPO, and were valuing the company at $100 Billion. When I started digging into their financials a bit deeper is when I started getting wary.

Facebook’s revenue in 2011, which was almost entirely advertising driven, was a mere $3.8 Billion – 12% of which was generated entirely through Zynga (social games, not exactly the most secure future). To put that into perspective, Apple’s revenue in 2011 was over $100 Billion.

Now here comes Facebook’s 2012 IPO, valuing the company at $100 Billion. How can a company be valued at $100 Billion when that company is only doing $3.8 Billion in revenue a year? That math doesn’t add up for me… Especially when you consider with 800,000,000 active users, that’s all that Facebook has managed to squeeze out of them is $4 Billion?  How much financial growth can Facebook really expect to have? Even if they had every person on the planet using their site in a few years time, they’d only be doing ~$28 Billion in revenue if you extrapolate those figures out proportionately.

So when the math appears funky to me, it’s usually a signal for me to stay away from Wall Street. That’s when you lose the shirt off your back.

Then I read this little article, which basically says that Facebook founders and investors plan on selling more than $5 Billion of their own shares during the IPO. So precisely the amount the company originally sought to raise will actually be cashed-out. Remember that last bullet point? “Make the founders & investors wealthier.” Granted, $5 Billion is just a fraction of what the investors and founders own entirely, so they’re still holding on to the majority of their shares, but nonetheless it’s Wall Street getting wealthier through the common man.

So what? So the rich get richer, but I still have a chance to buy in at $30/share and sell while its trading in the hundreds of dollars range, I could still make a tremendous return on investment myself, right? Not necessarily… It’s not a given that Facebook will trade that high. For Facebook’s stock prices to go up to, say, $150. That’d give me a 5x return on my investment. That would mean Facebook’s valuation would be at $500 Billion….

… To put that into perspective, Apple’s valuation is currently at $500 Billion. Is it really realistic to measure Facebook’s worth (3.8 billion in revenues) up against Apple, which doing $100 Billion in revenue annually?

No, it’s not. It’s not even reasonable to project Facebook at half, or even a quarter of Apple’s worth anytime in the near future. What’s more likely is any number of things go wrong which wind up crushing Facebook. Frankly, I can’t even figure out where Facebook pulled the $100 Billion valuation from with only $3.8 Billion in annual revenue. It’s absurd.

So if Facebook’s stock price does triple, quadruple, or more in the months after its IPO, it will be for only one reason… Market manipulation. And the average Joe citizen, like you or I, cannot compete on the level of the Wall Street billionaires. They’ll always have the upper hand, and will always use us to line their own pockets further – Especially with such a high-profile public spectacle as the Facebook IPO.

So will I be buying into the Facebook IPO after all? Probably not. It’s relatively pointless at this point to participate in our stock market. Unless you’re in insider, you’re running an unreasonably high risk of getting abused. It’s best to earn your living the honest way.

Disclaimer: I am no financial expert, so take my advice with a grain of salt. This is a very elementary and trivial perspective on a tremendously complex and corrupt scheme. If anything, that’s more to my point.