Pretty soon, you will be able to own a piece of the world’s largest Internet phenomenon, without any Zuckerberg-esque knowledge of coding required. Eclipsing Google’s market debut in 2004, Facebook recently filed for an Initial Public Offering (IPO) of more than $5 billion worth of its digital empire of photos, friendships and pokes.
Before determining whether or not this should concern us, we should first examine what the news about Facebook “going public” actually means. If you are familiar with the concept of an IPO, skip the next two paragraphs.
If I ask you to think of a “public” company, perhaps Ford, General Mills or Apple will come to mind. The two main differences between these public companies and a currently privately-owned company such as Facebook are that individual investors have access to all financial information regarding the public company. Investors can buy and sell public company securities — including fractions of ownership of the company, or stocks — on an open marketplace, such as the stock exchange.
An IPO transfers all or part of the shares of a private company to the open market for trading among individual investors. Facebook imaginatively chose the ticker symbol FB for their stock, and in a few months you will see the live FB quotes on Yahoo Finance or CNBC. This is significant for public companies, which receive contributed capital — money they can use to fund further development — and assign a total dollar value, or market capitalization, to the company.
Some say Facebook’s IPO, which was filed Feb. 1, could eventually peg the worth of the company at $100 billion. To put that unfathomable number into perspective, Google is worth $197 billion, and Ford, $48 billion. The realization in wealth for Zuckerberg and his Silicon Valley friends is newsworthy, but how will the rest of us be affected?
If you are a Facebook user, I predict your experience browsing the site may eventually change because of management appealing to a new set of goals. Facebook’s four dollars and thirty-nine cents earned off of ads per user per month pales in comparison to Google’s twenty-four.
With outside investors pressuring Chief Executive Officer Mark Zuckerberg for higher profits, the only ways to make up the difference between other sites’ earnings and Facebook’s are to add more advertising to the site’s pages, or decrease overall costs. With alternative social networks such as Google+ eager to poach Facebook users, charging users fees for using Facebook is certainly out of the question. Servers and employees would need to be scaled to reduce costs, leading to slower site performance and a decrease in innovation for the site.
The pressure to monetize the site through displaying as much advertising as possible might not bother you if you hope to benefit financially from the Facebook IPO. But unless you are a high net worth investor, chances are you will not get first dibs on FB shares. If you were then to buy the stock, you would most likely not be getting shares from the IPO, but rather the secondary market.
History has shown the financial fate of sizzling hot tech stocks, such as Google, LinkedIn and Groupon, going public. A study of more than 1,200 IPOs found that investors who are fortunate enough to get in on the offering usually realize a spike at the first day of trading, but then “… over the next year [the stocks] under-perform the market by 2 to 3 percent per month.”
It would be naive to think Facebook’s IPO will make you instantly rich, even though hundreds of Facebook employees near Silicon Valley will see a substantial increase in net worth. The rate of sign-ups on Facebook confirms the company’s growth potential: Facebook is very much an international website, with only 20 percent of active Facebook users located in the United States and Canada. Yet most analysts are torn. “Pandemonium is what I expect in terms of demand for this stock,” says Scott Sweet, senior managing partner at IPO Boutique, a financial advisory firm.I will not be buying this stock right after the IPO because I think there exist too many other compelling options, especially in the oil and gas sector, which carry less risk and non-speculative dividends.
College students often claim an “addiction to Facebook,” but I would assert that the addiction is not to Facebook, but rather to social networking more broadly. If claiming you “own Facebook” brings you utility, then it may be entertaining to pick up a few shares for kicks. But with investors voting on board decisions, I am not confident that as a public company Facebook will be able to maintain its paramount advantage over other sites’ user experience.
Andrew Kouri’s column appears Fridays in The Cavalier Daily. He can be reached at a.kouri@cavalierdaily.com.