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Tue March 13, 2012
Should you buy Facebook stock?
Facebook filed for its initial public stock offering in February, and the IPO could take place at any time in the next several weeks.
Should you buy the stock? We ducked that question a month ago on Money Matters but now, financial commentator Greg Heberlein is willing to offer some advice.
As with many financial issues, the answer is dependent on your personal circumstances.
On the plus side:
With nearly a billion users, the social media company is the elephant in the room. It has a tremendous base.
With the offering raising as much as $10 billion, Facebook will have the resources to expand as well as to survive downturns. A large array of shareholders will ensure a liquid trading market.
As the social media phenomenon expands, Facebook’s financial position should be even better. Advertisers are expected to make the company very profitable. It's already off to a great start; the company reports a billion dollar profit on revenues of $3.7 billion last year.
But on the negative side:
A competitor that doesn’t even exist now could undermine Facebook with new ideas and new technology.
Outside investors will own only about 10 percent of the stock, meaning Facebook insiders can inordinately influence the stock price and fend off any attacks from outside shareholders.
The company’s value after the sale may be excessive. Facebook will sell at as much as 75 times cash flow. Apple sells at barely one tenth of that. The initial Facebook price will be something like 25 times revenue, four times the norm.
Facebook also could be undermined by privacy issues, potential patent suits by Yahoo and other threats not even on the horizon.
So, should you buy it?
The risks may or may not outdistance the rewards. If an investor needs money in the next five years – perhaps for college, or for purchasing a home, or for retirement, or for a cash reserve – no stock investment makes sense.
But, if you can hold the stock for five years or more, Facebook may be the best investment you’ll ever make. Unless it isn’t.