Should you buy Facebook share?

Should you buy into Facebook?

You use it, your friends use it as do 845 million others. Now the company is about to go public which means you can own a slice of the remarkable success story that is Facebook. But is it a good idea to buy Facebook shares?

By James Andrews

So now we know. Facebook has thrown open its books ahead of its first public share offering and we can see for the first time how the company that hundreds of millions of people use 

every day works.

More than that, we will soon have the chance to get our own piece of that pie. But should you?

We take a look at the key things you should think about before you decide you would like a share in Facebook.

Current position

Firstly, unlike many young technology companies Facebook makes money. Quite a lot of it. And it’s growing fast. The company Mark Zuckerberg founded in his room 8 years ago made $1 billion (£631 million) last year, that’s up from $606 million (£383 million) the year before.

Most of that money comes from adverts – 85% of it to be exact. This is down on 2009 (98%) and 2011 (95%) but still makes up the vast majority of income. Another 12% comes from gaming platform Zynga – which you can buy shares 

in now.

Given a potential $100 billion valuation, that means Facebook is far from a cheap share and not one people should be looking at to pay an income. Especially as that’s not what all-powerful founder and biggest shareholder Mark Zuckerberg thinks the business is about.

“Facebook was not originally founded to be a company. We’ve always cared primarily about our social mission, the services we’re building and the people who use them,” he said in a letter to potential investors.

“We don’t build services to make money; we make money to build better services.”

Buying for growth

So if you want to own Facebook shares, they won’t pay you a massive income while Zuckerberg is in charge – but could it grow rapidly in price?

Facebook’s revenue grew 88% last year, it also sold 42% more ads than the year before for an average of 18% more each.

But the period of massive growth looks to be over. Facebook currently has 845 million active users and growth in the developed world is slowing down. At the end of last year it was revealed that the company’s share of social networking in the UK dropped 7%.

It’s something the company acknowledges itself: “Our revenue grew by 88% last year — and that’s simply not sustainable. Growth is bound to decline,” Facebook said in its SEC filing.

There remain massive growth opportunities in the developing world, but these come with more problems. Places like China and India are growing fast, with millions more people getting online each month, but their governments are much more protective of their home markets. Advertising there is also worth less per person than in the western world.

That means the company’s best path to revenue growth still rests on the West – convincing advertisers to spend more and users to spend more time and do more things on the social network. The sheer scale of the business with its hundreds of millions of users means there is plenty of scope to make more money.

However, the chances of growth rising as fast as it has done in the last few years rest on finding a way into the growing economic powerhouses of places like India and Russia.

Risks

We also got an insight into the biggest threats facing Facebook from their SEC filing - 35 of them to be precise.

While some of these are rather hard to account for – including “The media could turn on us” and “Unspecified future events could tarnish our brand” – there are some pretty big and tangible risks too.

The key risks are around laws, users and people.

Fistly, Mark Zuckerberg controls the company pretty much entirely, with enough shares to push through anything he fancies. While that’s been a good thing so far, it’s an awful lot of power in the hands of a 27-year-old. One who could get bored and leave, be forced out or become seriously ill.

Secondly, with so much relying on advertising, any technology that lets users block ads could kill the revenue. Worse, users are increasingly accessing Facebook through mobile phones and tablets. These don’t display ads. Facebook has got around such problems in the past, but it’s a risk. Especially as the only other significant source of income comes from a third party, Zynga, and this partnership could end.

Thirdly, governments and laws. Already some governments restrict Facebook access and more could easily do so. On top of that, every country has different laws around data and these laws change. Facebook uses user information to better target adverts, law suits could seriously hurt it.

Finally, competition. Google, Microsoft and Apple are far better-funded and more established companies and would like to take money and users away from Facebook or potentially launch competitors to it. New entrants like Twitter are growing fast and there’s always the chance something we haven’t even heard of yet could wipe the floor with it.

Bebo was launched in 2005, bought by AOL for $850 million in 2008 and sold to Criterion Capital Partners for an estimated $10 million in 2010. Facbook simply blew it out of the water. Who’s to say there isn’t a new Zuckerberg in a bedroom somewhere currently writing the next big thing?

To buy or not to buy then

With any initial public offering there is risk: From the utility companies in the 1980s to the building societies in the 1990s and 2000s – not to mention the dotcom bubble around the turn of the millenium.

Companies’ prices frequently spike on the day of release, crash shortly afterwards and then settle in for the longer term.

Investors in the likes of Google and Amazon have been richly rewarded for backing them early, but those of the likes of Northern Rock 

(who for a while looked to be quids in) 

have lost out big time.

Ultimately, investing in Facebook shares or those of any new company is really a question in investing in an individual or a story.

So far Mark Zuckerberg has managed to turn an idea into a multi-billion-dollar business in dozens of countries and languages with thousands of employees. More than that, it’s one half the online world has signed up to and advertisers are clamouring to be part of it.

The simple question you should ask yourself is “Do you think he can keep doing it?” If the answer is “yes” then buy. If you’re not sure, then there will be plenty of time later to soberly look at how the business deals with the threats and opportunities it faces, and put money in then.