Opinion: The Deal With Facebook Stock Trading

Aaron Holtzman May 21, 2012 1
Opinion: The Deal With Facebook Stock Trading

Dear America, please stop being lemmings when it comes to investing, make informed decisions, and stick to your guns!

Welcome to America, land of instant gratification!  Apparently, after a coma induced by the hyped up IPO of Facebook, the brilliant investors on wall street as well as the average joes in their living rooms are now kicking themselves in the butts for investing in Facebook.  I mean, who on EARTH would take a bet on the largest social media site to have existed!?

The share prices of Facebook have fallen, and yes even showing double-digit percentage drops (approx 10%), however who buys into an IPO and expects to sell the next day?  Investing is taking a bet on a company’s success, and people cannot be skittish on Facebook’s first real day of market trading.

Some of the biggest critiques of Facebook is “how profitable is it”.  Facebook is in a similar situation at Google was when it first emerged as a major company.  For Google, the concept of online advertising was in its infancy and many considered online advertising to not be a viable source to generate business.  Facebook has a leg up in this respects because it has a proven advertising structure and it will only continue to become more effective…not to mention the millions of users who can easily be targeted by advertisers based on demographics.  Think about how incredibly easy it is to find a target audience on Facebook based on age, sex, groups, likes, etc.  Advertisers have their target audience served on a silver platter…and this is something that has been established as a profitable source of revenue by Google.

When Google first went public it took a dip in the first month, from approx $108 down to $100 (an 8% drop).  Seven years later, if you bought it at $108 you would have made a 566% profit.  If you purchased it at $100, make it a 612% profit.  Yes there is a significant difference between those profits.  However, how many of the investors who bought Google at $108 and sold at $100 bought it back before the major price increases the company’s shares had?  If nothing else, if an investor bought Google at $108 then they should be willing to have paid $100 for the Company and reaped even greater benefits.

For those of you who bought Facebook after the IPO and are considering selling, ask yourself “why did I even get involved in this company”.  If the answer was to make a quick buck, well it’s too late for that.  However if you stick it out, and Facebook continues to be a success and forms a way to increase revenue for each user by improving advertising and paid services…then in 5 years you will able to brag to your friends about how you go in on the “ground level”.

As Warren Buffett said “Investors should remember that excitement and expenses are their enemies.  And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful”.

I want to make sure that the reader understands that I myself own several shares of Facebook.  That being said, above is the reason why I am not  selling facebook and if anything buying even more.

One Comment »

  1. Mike May 21, 2012 at 8:02 pm - Reply

    Guys… your comments are fine – as far as google is concerned – and I won’t go into the argument that Google is the exception that proved the rule… BUT

    Did you look at the Price/Earning ratio? Even IF you believe that Facebook will be 10x more profitable in the future (5-10 years) that is already priced in… so basically even in a best-case scenario the upside is extremely limited (unless the market goes totally crazy and turns completely irrational – in that case it will be a classic bubble).

    Also consider that revenues and growth in general (whatever criteria you use) have slowed down massively… reversing that will take a lot of work and luck. Not saying it can’t be done but it’s one thing to invest in a growth stock where the growth is accelerating (warranting higher valuations) and another thing to invest into a “growth” stock that seems to be past it’s growth phase.

    Last but not least: the market today is VERY different from the market at the turn of the century (millennium) – when google went public there were no (significant) secondary markets, there weren’t so many venture capitalists looking to make a gain as soon as the stock goes public, etc. etc. etc… it’s a very different world and the FB IPO was priced exactly right – for the company. The pricing left little or no money on the table which means maximum profit for the company and early investors…

    If you believe FB will grow like google (although there are virtually no parallels) then you can surely argue that one should buy and hold (possibly when it hits bottom) – just realize that this assumption has already been priced-in by the market (and early investors) so this assumption is anything but obvious…

    I can only say good luck and I mean that sincerlely… although I’m pretty good at this game (never lost any money on anything, although I was actively trading just before the crisis hit in 2008, even holding Lehman Bros. shares ~1 week before the crash) I don’t claim to know more than you (or anyone else)… if I did I wouldn’t be here sharing my “wisdom”.

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