Sunday, May 27, 2012

Facebook - Fad or the real thing?

Facebook (FB) recently sold shares to the public and has been in the news for several reasons.  The Initial Price Offering (IPO) was issued, and the current stock price fell well below where it started.  This obviously happens from time to time.  I was reading an article that wrote about 15 companies that had failed IPO.

What is a failed IPO? 

Simply put...the stock sells for less than you bought it at the beginning.  With smaller offerings this is much more frequent which is why buying into an IPO is quite risky.  The chance of incorrectly pricing the company is great for a few reasons.  This is true for mergers as well.  The original owners want to get the most money it can for selling the shares to the public.  However, the company doesn't want the shares to go down immediately after the offering.  In short, the IPO price needs to be less than what the market is willing to pay for, but not too much less.  For example...
Facebook last traded at $31.91.  The company priced FB at $38 per share.

Had Facebook sold the shares at $25 per share...people would be saying FB was IPO was a bargain.  Because it was sold too now start seeing articles written saying FB is worth $7.50 or worse.

All of this talk is nothing but noise.  What really matters is whether Facebook is a company that can make money for the shareholders.  CEO Mark Zuckerberg controls 56.9% of the voting power according to Bloomberg.  This means regardless of share price Mark Zuckerberg is going to get paid.

Is Facebook a standard?  I believe that Facebook is the standard for social media.  Much like Microsoft is the standard for operating systems.  Blu-ray is the standard for HD.  Coke and Pespi are the standards for the cola industry.  Google is the standard for search engines.

Standards can be broken.  However, typically this is due to new technology rather than a competitor defeating the current standard.  For example...VHS was the standard for a long time in the 80s.  This gave way to DVDs.  HD DVD tried to become the standard for High Definition TV, but lost this standard to Blu-ray.  All those who purchased HD DVD did Toshiba.  The Blu-ray Disc Association became the new standard for high definition.

Is Facebook a Fad?  I do not think so.  Facebook offers something that no one else does.  A quick and easy way to get in contact with people, play games and share your life with others.  Unless someone comes out with a new way to communicate with people, and can market this technology successfully...I do not see Facebook losing their standard within the next decade.  The most important thing to remember is Facebook created vast wealth and didn't even charge their users anything.

Kind of like this is free.  Free is good!

Disclosure:  I do not currently own shares in any of the mentioned companies.

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