Investment firm Goldman Sachs recently struck a deal to invest big bucks in Facebook in exchange for allowing its wealthy clients to buy shares of the company via a “special purpose vehicle.” It’s a controversial move that allows Facebook to raise some cash and Goldman to make big money without having to go through the rigors and public disclosures involved with a traditional initial public offering. So how rich do you have to be to buy from Goldman Sachs? How about a net worth of about $1 million and an annual income of $200,000?
Yeah. I don’t have that either. While it’s difficult for the average investor to buy shares in Facebook right now, there are rumors that the company will go public in 2012. This will allow you to invest in your favorite time-waster the same way you invest in Coca Cola (KO) or Microsoft (MSFT). However, the question remains: Will Facebook be a smart investment for you? Consider the following factors before buying.
You Already Know A Lot About Facebook
“Invest in what you know” is one of the richest investment dictums from Warren Buffett, the “Oracle of Omaha,” and it’s served him well through the years. Buffett famously avoided losing his shirt when the tech bubble burst back in the early part of this century. He never understood how all of those internet companies were going to make money, so, despite the huge run-up in some of the stock prices, Buffett avoided them altogether.
So take a look around. What company do you know really well? Where are you wasting — I mean spending — a good deal of your time. Facebook, right? It might even be distracting you at work and hindering your career and, subsequently, your chance to make more money. If that’s the case, then maybe it will be right for you to stop fighting that impulse to be on Facebook constantly and put your money where your addiction is.
Beware: Facebook Is Making Money Off You
Just because you “know” Facebook and you spend a lot of time on Facebook doesn’t mean you should buy it at any price. The price you pay for any stock should reflect how strong you think the company’s earning potential is.
For example, SharePoint is a website that allows Facebook employees who have been granted stock in the company as part of their compensation to sell that stock to the public. One investor recently offered to purchase 1,000 shares at $60 per share. That would imply that Facebook, as a whole, is worth $136 billion. But the deal struck by Goldman Sachs currently values the company at $50 billion. That would put the share price at $22. Clearly the emotion of owning the latest hot company can make people pay more than they should for a stock. So don’t get wrapped up in the hype when Facebook goes public. Remember, Facebook is popular. We all know that. But for you to make money off of owning its stock, the company has to make money.
Will Facebook (Read: You) Be Profitable In The Future?
Wait a second — you thought Facebook was free? Well, it is free if you want to log on and post photos of your weekend at the beach. It’s not free to advertise on it — and ads are bringing in big bucks. It’s estimated that Facebook made $500 million in 2009 and close to $1 billion in 2010. (Nobody knows for sure, since the company isn’t public yet.)
So in order for the company to continue to make money, you have to believe that people are going to continue logging on to Facebook and viewing those little ads you see on the right-hand side of your Facebook page.
Here are some other key questions to ask with regards to Facebook’s earnings potential:
– Is the industry growing as a whole? Is social networkingexpanding and evolving, or will it be seen as just a trend that captured people’s interest for a few years?
– Will Facebook find other sources of revenue? Can it increase what it currently takes in from online game systems like Farmville and Mafia Wars?
– How will Facebook fare in changing economic times? Is much of Facebook’s popularity due to the recession? And will people spend less time at home or online once our overall economic outlook improves?
Be Patient With Your Return
Many people are chomping at the bit to buy Facebook because they missed out on Google. Google’s initial public offering saw shares going for $85. The other day it closed at $614.21.
If you buy Facebook, don’t expect the same meteoric rise. If it does, that’s great. And if you want to turn around and sell to make a quick profit, that’s your choice.
But the share price may stay flat or even go down. So if you’re going to invest, you have to use dollars that you really don’t think you’ll need for at least 10 years or so. That will allow you to ride out the ups and downs of the market (caused by economic conditions and normal market risk) and take advantage of the true, long-term growth potential that any well-run company should experience.