5 Reasons I Won’t Buy Facebook Stock

fb 300x300 5 Reasons I Wont Buy Facebook StockBig news in tech was the announcement of Facebook’s IPO. This IPO has been highly anticipated by hopefuls for years. Many people just want a piece of the social media pie, as seen with the LinkedIn IPO.

With such big names stepping out of the shadows of the private company realm, and stepping into the light of the publicly traded, I have to say that I’ll be sitting this one out.

There are probably 100 hundred reasons people will give you to invest in Facebook, and in all honesty, it could turn out to be an awesome investment, but I have 5 reasons why I won’t touch Facebook stock unless it is given to me.

1. Consumer Trends

Do you remember Yahoo Chat? AOL? How about Friendster, Xanga, LiveJournal, or Myspace? All of these companies were well known social sites in their own regard. Each of them is left as a hollow shell of what they once were. They stand timidly in the shadows of their former greatness. Each company was left for the next in mass exodus after mass exodus for the next company with a cool idea.

Consumers are fickle, especially when they aren’t financially attached to something. All it takes is one company to come out with a better product or a better system. When you’ve got hungry companies like Google, Yahoo, and Microsoft looking at you, there will be an unending power struggle.

2. Uninformed Hype

I walked into an office and heard some people saying “I think going public means they’ll be selling stock.” Followed up by “Facebook is going to sell their stock? I’m In!” I’m not an elitist in any definition of the word, but a certain truth exists in what Joseph P. Kennedy Sr. said about an experience he had while getting his shoes shined:

“It is time to get out of the market when I receive stock tips from a shoe-shine boy.”

I think it is great for people to get interested in investing, and learning how to do it properly, but the conversation I walked in on was people talking about tossing their hard-earned money into the stock market just because they’ve heard of a company and used their service. That isn’t stock investing, that is gambling.

A Facebook IPO guarantees one thing: There will be rampant speculation not only by people who know what they are doing, but they will probably be outnumbered by speculators who have no clue what they are doing. That means the stock price will be driven up unnecessarily, and without warrant.

3. Privacy Revolution

While this is less likely, it is certainly a possibility, and we’ve seen bouts of it pop up. Privacy revolution is certainly a real thing. People are often startled when I can type their name into a website, pull up their address, phone number, and immediate family members.

All it takes is a real scare to have people leave Facebook in droves. An attack, such as the one mentioned below, could be just the thing to completely ruin Facebook’s business. We hear privacy advocates constantly in the media talking about the dangers of Facebook. If those danger’s are ever realized, it could spell doom.

4. Cyber Attacks

Cyber attacks rarely occur (done with the sarcasm). All it would take is one simple breach of Facebook to have all the very personal data stolen. If publicized well enough it could trigger my concern #3 (Privacy Revolution). If it doesn’t, a proper attack could cripple their infrastructure entirely. No infrastructure, no Facebook.

5. Government Intervention

Depending on on how things continue moving, government intervention could become a problem. With a lot of the very loose cyber-bullying legislation constantly being proposed, and the government’s need to intervene where it ought not to (Durbin Amendment Anyone? By the way, I was right, it isn’t saving consumers money like they promised) we could easily see government hamper the success of Facebook.

Examples of legislation that could destroy Facebook:

Are there reasons to consider investing in Facebook? Absolutely! But I won’t be partaking. Each of the reasons I listed above are perfectly real, and I’m sure that some combination of them will exist and affect Facebook. Will it take the company down? I don’t know, but there is a good enough track record with their competition that I don’t anticipate finding out.

Updates:

Comments

  1. says

    Hey Timothy!
    Great tips! It’s funny that you should right this because most articles would try to convince me of the reasons to invest in Facebook and I enjoy the hearing the reasons why not to. It’s like when I read customer reviews before purchasing something online… Instead of reading the 5 star reviews, I’d rather read the negative and see why people don’t like the product. I appreciate your honesty and openness.
    Humbly Yours,
    Laura

  2. says

    You are right on track, Timothy. Many people will buy into the hype, which drives the IPO price up, only to fall quickly when the dust settles. I agree it good be a great investment, but one better have an awesome crystal ball to know exactly when to buy and exactly when to sell. This is a very high risk investment which usually means either high returns or high losses!

    Personnally, I am a little more conservative, so I will stick with decent, safe returns instead of investing in the “lottery”

    Great advice!

    • says

      Hey @WhyYouShouldGoGreen,

      You’re dead on. The hype alone will make even the most educated investor a gambler. I’m also more conservative. I understand risk/reward, but there are times where I think investing in myself is a better choice than investing in a publicly traded entity.

      Thanks,
      Timothy

  3. says

    With a potential 100x earnings price target, it’s a tough argument to buy. It will be interesting to see how it plays out but I’d hope that valuation will make some people think twice before buying.

    • says

      Hello @NovelInvestor,

      I have the same hopes, but I definitely know that a lot of average joes are going to get suckered by this. I think the more seasoned investors will sit it out and see what happens. The IPO underwriters are going to make out like bandits on them!

      Thanks,
      Timothy

  4. says

    I like your way of thinking here. It will be quite interesting to see how everything ultimately plays out, but it’s hard to imagine too many entities that are this hot in the news, and with higher expectations. With the rapid pace of change, who knows what’s coming next.

    • says

      Hey There @Squirrelers,

      I agree! I may not be investing in them, I will certainly be a spectator. You don’t get IPOs this dramatic everyday! Unfortunately though, you’ll probably see a lot of very upset people lose a whole lot of money! Thanks for stopping in :).

      Thanks,
      Timothy

  5. Talinec says

    Hey Timothy,

    Being that I was an investment banker in my previous career, I can say that I completely agree with you! It is a high risk investment and not worth it initially (worth watching it).

    This is one of the best written articles I’ve read on the topic!

    • says

      Hi Talinec,

      Thank you for the lovely compliment! I agree, there is too much risk, and not enough reward. The underwriters will make a killing on this before any of the little guys do.

      Thanks,
      Timothy

  6. says

    In my analysis I have touched on the problems that Facebook is having with privacy and the backlash for its users. You are absolutely right that a revolution is occurring in online privacy. Users want more privacy in their search and are getting freaked out with ads that are too relevant. Google is the first to handle this. How they deal with this could say a lot about Facebook. Great work.