MAX MASON May 17, 2012
Illustration: Rebecca Fleming
Facebook’s ascent from a tiny social media website created in a Harvard dorm to a cultural phenomenon within a few years has unsurprisingly sparked global interest in the company’s imminent stock market debut.
For most of its 900 million-plus users, Facebook has been less a product and more a part of everyday life, as the sharing of news and photos with friends offers users near-instant gratification.
Now that the company is finally about to sell shares to the public, though, the interest for many will be how to share in what they hope will be instant profits.
Facebook goes public tomorrow, US time, but most Australians will have to wait some time for they can snap up shares. The company itself is offering only a fraction of its total shares - less than a fifth - and most of them have already been snapped up by institutional investors.
In Australia, both CommSec and E*Trade allow customers to purchase stock in the American market.
Silicon Valley, famed for its tech start-ups, has never seen a float of this size. Chief executive and founder Mark Zuckerberg, just 28 this week, has wowed investors large and small - without giving up his wardrobe of hoodies.
The social media giant may end up raising $US18 billion even from that partial float after raising the number of shares available by a quarter. Share prices may jump beyond the $US34-38 initial target range when trading begins.
Sharing the spoils
So what should your average Australian investors make of it all?
Brian Phelps, general manager of distribution at CommSec, says investors here should consider five important points before deciding whether Facebook’s heady mix of risk and reward is right for them.
Your personality, reasons for investing, and what you hope to gain from the stock are key in evaluating whether or not a particular share is for you, says Phelps.
As with any share, but perhaps particularly with Facebook, individuals must gauge the level of risk they are comfortable with before diving in.
As a US-listed stock, Facebook will be harder to access than typical Australian stocks and may turn out to be less fluid should investors decide to hold on. (Zuckerberg himself rejected two big offers from Yahoo and Microsoft, and will continue to own almost a quarter of the company after the share sale, and control 58 per cent of the voting stock.)
‘‘[Facebook] is a stock that trades in a different jurisdiction - it’s trading overnight when you’re potentially not aware of what it’s doing, so you need to be mindful of that,’’ says Phelps.
Are you the type of investor who constantly watches the stock markets? For investors who are less obsessed by financial markets and are thinking about buying Facebook shares just because it’s hip, it may be best to take a look at GiveAShare.com and Oneshare. The two firms are offering the chance to buy a single Facebook share, which comes with a paper stock certificate – a nice souvenir if not necessarily a collector’s item given their likely abundance.
The old adage '‘don’t put all your eggs in one basket'’ applies to most investments but especially so when buying into a potentially volatile asset.
‘‘A lot about people who invest solely in property because they like having something in bricks and mortar,’’ says Phelps. ‘‘I could mount of counter-argument that says ‘yes it’s good to invest in bricks and mortar but it’s probably just as worthwhile to also invest in shares, which tend to be more liquid, come with less stamp duty and can be managed on a daily basis as opposed to a more long-term investment such as property’.’’
A diverse portfolio reduces the potential for concentration risk. This means that if you already have investments in the technology sector and are desperate for some Facebook stock, it would be wise to draw down some of your other technology assets and move the funds across.
For those who have no technology investments in their portfolios, Facebook offers an opportunity to move into a growing sector provided you are willing to take on the associated risks.
Much like the first point, considering what type of investment you are after may determine whether you are the type of person likely to invest in Facebook.
"Have a plan and stick to it,’’ says Phelps. ‘‘Too many investors are buying shares and not understanding what their plan is, not understanding the longer-term opportunity is and therefore and jumping out midway through an investment cycle.’’
At this early stage Facebook is probably not the kind of stock you would be buying as part of your superannuation, especially if you are near retirement age. Its growth potential may be huge, but it lacks the long-term track record many would-be retirees would be comfortable with.
Phelps says when investing - put a timeline or a value on the investment and know when to sell.
‘‘If you set yourself a plan that you want to buy this stock at $5 and you want to see it go to $10 and it gets there well before you’re expecting it – sell it at $10. Those that hold out for $15 generally run into trouble along the way,’’ he says.
Gordon Gecko says ‘‘greed is good’’ but don’t let Hollywood cloud your judgment - make a plan and stick to it. And consider yourself lucky when the return you hoped for comes to fruition.
Do your research
Simple as it sounds, many people leave decisions entirely up to others.
‘‘Look at things like future earnings, evaluation of the company, accounts, these are essential,’’ says Phelps. ‘‘What does the competition look like and what is the future of that industry? These are things to consider.’’
Facebook, of course, is a young company. Launched in 2004, it has an impressive set of numbers: between 2007 and 2011, Facebook’s annual net income grew from $US138 million to $US1 billion.
It’s too early to tell whether this growth can be sustained but it’s the conviction that it will that’s luring many investors.
Will Facebook continue to grow? Important points can be found in the company’s IPO filings which stated ‘‘we do not current directly generate revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven.’’ With roughly 500 million of its more than 900 million monthly users logging on via a mobile device, that’s either a glaring weakness or a significant untapped market for the company.
And, of course, the market can be dynamic in a negative way.
Some 85 per cent of Facebook’s revenue comes from advertising, so the loss this week of an ad campaign by General Motors because of a poor response raised some concern.
Facebook faces the tough task getting the balance of ads it puts on its online and mobile sites right. Too much and it may scare users away, too little and the company’s growth stagnates - not what the newbie investors want.
Zuckerberg, to the admiration of many, looks likes he prefers to remain faithful to Facebook’s users and their interests - but investors will have to wait to see whether such a stance is good for them.
‘‘Facebook was not originally created to be a company. It was built to accomplish a social mission - to make the world more open and connected,’’ says Zuckerberg in the company’s statement of intent at the IPO announcement.
‘‘We think it's important that everyone who invests in Facebook understands what this mission means to us, how we make decisions and why we do the things we do.’’
And it’s worth watching what the competition gets up to.
‘‘Look at how unique the product from that company is,’’ says Phelps.
‘‘If someone going to trump Facebook in the near future and come up with some kind of new technology that renders Facebook effectively useless?’’ he says.
Where is the future of social media? Facebook was not the first social media site - remember MySpace or Bebo? If you don’t, look them up - Rupert Murdoch, chairman and CEO of News Corp burned at least $US545 million on his purchase and then firesale of MySpace - a reminder than even savvy investors have made dud calls in the technology sector.
Facebook has identified its chief competitors as Google, Twitter and Microsoft - none of them exactly neophytes.
Research these companies and more, Phelps says.
Note, though that the many billions expected to be raised from the IPO won’t just be lining the pockets of Facebook executives - although some of them might be tempted to retire.
Zuckerberg claims to be an innovator who truly believes in his creation. There is no doubt that much of the IPO largesse will be churned into the business not only to help it expand, but to ensure its stays ahead of the competition.
In sum, investing in Facebook carries both risks and opportunities. So know your limits, don’t extend yourself and do the proper research. Or perhaps, strap in for a wild ride.