I Knew That Facebook Would Be A Failed IPO

Not that many people asked me, but I felt that the Facebook IPO was a bad idea from the beginning.  Mrs. Beagle can attest to the fact that I was never excited about.  She asked if I thought it would do well.

My answer was clear: No.

After the initial price and number of shares was released the evening prior to the IPO, I had to do a double take.  Not only would this not go well, I thought, but this was a disaster in the making.

Of course, I really didn’t define disaster very well, because after an initial offering price of $38, I thought $25 would be a disastrous level, and of course it has gone well below that, touching below $19 its lowest point so far.   That’s half of it’s IPO value gone.

Here are the reasons I never felt that Facebook was a good buy, and why I still don’t to this day, even at what many would consider ‘depressed’ levels.

They took out any and all upside.

As I mentioned above, when I heard the pricing, I knew this was a recipe for disaster.  Long story short, at the last minute they decided to raise the price of each share higher than what pundits had been forecasting, and they decided that demand was enough that they released more shares.  This was great news for the company because it milked out every last cent of valuation.  The only problem is that, from an investors point of view, it’s all about upside.

When Facebook and their underwriters took every dollar for themselves, it left no upside to the stock.  Investors want upside, they want growth, they want potential.  When that was off the table, it became an instant ‘Sell’ because nobody wants to be sitting around holding onto something with no upside.

It was just too late.

I first joined Facebook in December 2007.  That was roughly 15 months after they opened registration to anyone and everyone.  Prior to that, it was only available at colleges.  Once they opened the registration for everybody, subscriber count exploded, and remained in growth mode for about three years, before starting to level off.  Leveling off is never, ever good for a stock whose investors are counting on growth.

They got to over a billion subscribers recently, and while it might be possible that someday they get to two billion, it’s going to take much, much longer for those second billion to join the ranks than it did for the first.  Slowing momentum is not something that impresses Wall Street.  They likely would have raised a lot less money in the IPO, but if they would have done an IPO a few years ago when subscriber counts seemed limitless, they could have had amazing buzz and might have been one of the more successful IPOs in history, instead of being what many are calling the worst IPO ever.

The MySpace factor

Before I joined Facebook, I had a MySpace profile as did many people back in the day.  I even remember telling Mrs. Beagle that, no, I did not want to join another community based site.  She convinced me, and like most that had both profiles, I eventually deleted my MySpace page once Facebook became the place to be from a social networking standpoint.

(Does MySpace even exist any more?  If it does, who uses it?)

The problem with any of this is that obscurity and irrelevance could happen to MySpace, why couldn’t it logically happen to Facebook?  What if the next big thing is/was being developed that will someday have Facebook members deleting their accounts in droves?

Before you argue that Facebook is just too big and too dominant, let’s look at other technology based products that once ruled the marketplace:  AOL ruled the connectivity market for years, now is an afterthought.  Yahoo once ruled the search engine space, now holds around 10% of that market.  Netscape was once the biggest web browser out there.  So, unlike in the banking industry, within the technology space, there doesn’t seem to be anything that’s ‘too big to fail’.   I believe Wall Street investors are cautious and have to factor this into their valuations, meaning a crazy market value just isn’t logical.

Going Public Puts The Cool Factor At Risk

Love them or hate them, many of the changes that have rolled out at Facebook over the years have generated a lot of buzz.  Every time they change a feature, or how you like something, or introduce a feature like ‘Timeline’, it was instant news.

Innovation was key for Facebook, but when you go public and you have to focus on profitability and growth and revenue, and your focus is on the investors and not on the users, the buzz gets a lot less cool.

Who in their right mind is going to think that whatever new advertising model Facebook has come up with is ‘cool’?  Probably not many.  Yet, that’s where Facebook has to commit resources now.  Does this potentially divert from innovations that users will actually appreciate?  It’s hard to say, but so far, the user community of Facebook has seemed pretty underwhelmed since the IPO.

The biggest ‘innovation’ that I can think of off the top of my head is that you now have the privilege of promoting your post (to make it appear higher on the feed of your friends) by…paying for it.  How cool is that….not?

See what I mean?

So did I follow my gut?

It’s easy to write these things down now and say that I could see them, and I guess you’ll have to trust me on it, but I really did feel these things and felt that it would lead to a definitive lack of success for the Facebook IPO.

My biggest regret is that I did not act on this.  Unfortunately, I did not invest any money in shorting the stock, though I probably could have and made a good chunk of dough.

Readers, did you get caught up in the buzz that led up to the Facebook IPO?  Were you surprised once it began its downward trajectory or did you foresee it

19 thoughts on “I Knew That Facebook Would Be A Failed IPO”

  1. It did not surprise me at all. Whenever the media and everyone else is going crazy about something, that’s the exact time to start wondering. I too wish I would’ve shorted it as you could’ve made a killing on it. I really wonder what the long term prospects are for it. I imagine a lot of it will come down to how well they can monetize it and attracting advertisers.

    • I agree but even if they can do those things, can they continue growing the advertising business AND the customer base? Wall Street demands growth and if one or both of those things even flatten out, the stock will drift endlessly. Look at Cisco. Solid performance year after year for the most part, but the price has stayed pretty much the same for almost ten years because the element of growth is largely non-existent.

    • I agree. I hate advertising on my mobile phone so it’ll be interesting to see if they can actually pull it off without annoying people to the extent that they drift.

  2. Great post about Facebook. I had a sneaking suspicion that it was going to go south. The main reason, profits and the ability to make money. Facebook has no real way to monetize its subscriber base. Yes, they do make money, but not nearly enough for the size of their base. They are still scrambling to try and figure out how to properly monetize their subscribers. It will become overly saturated and probably fall apart one day. People bought stock because they thought that there is no reason why Facebook can’t kill it, but they haven’t and probably won’t anytime soon.

    • The fundamentals will tell the long term there. Unfortunately the people that seemed to buy in weren’t really paying much attention to the fundamentals.

  3. I’m also not surprised, but I love content like this — you did a great job explaining IPOs. Next, can you talk about how you have been successful in shorting a stock?

    • I’ll have to see what I can come up with though it’s been a long time since I’ve done any short term trading, which is probably the only situation I’d ever short a stock.

  4. I was very wary of the IPO just because of the hype surrounding it. There was no way its performance would ever live up to that. Great job detailing other reasons though. I would have said Facebook came along at the right time, where Myspace was a little early…but examples like Yahoo and AOL really make you think twice about how long Facebook can stay dominant in its niche.

    • If this site is still around 5-10 years from now, I’ll definitely look back at this article and it’ll be fun to see how things stand. If only I had a crystal ball 🙂

  5. I don’t think I ever participated in an IPO. I am usually very cautious and like seeing a track record for at least 10 years. If I were a gambler, I might take a chance for a very small position (a few hundred dollars), but I am not a gambler!

  6. When I tried facebook advertising all I would get is a bunch of fake clicks – with non resulting in conversions. That’s when I knew (2 years before the IPO) that facebook wasn’t worth donkey doo doo. I’m sorry for all the people that bought into the hype.

    • A real live example! I kind of think that the only ones who really convert are bigger brand companies. I’m not sure there’s room for the ‘little guy’ in Facebook’s model.

  7. Facebook could very easily go the way of pop singers. On top of the world today, no where tomorrow. It could also be that one like Justin Timberlake who makes it past the initial hype and rise and is able to continue to evolve and be relevant. I can’t believe I just used that analogy, but that’s what it reminds me of, and BTW didn’t Timberlake buy part of MySpace?

  8. I had the same feeling. One of my bosses bought it on the day that it opened and thought that she was going to be rich. I held my tongue. She got out after it bounced. It’s not just the growth of the site, but also the fact that they’re not very good at monetizing the site and have a hard time growing their profits.

  9. I work at an Internet company and saw this coming from a mile away! Funny how our CEO reminds us as we head into our own season of growth: We are NOT FB! Ha! 🙂

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