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Monday, 31 January 2011

Stocks of Facebook will turn into a rollercoaster ride!

We found love, oh
So don't fight it
Life is a rollercoaster
Just gotta ride it

What is it with some things in life? Smoking, drugs, partying and IPO’s of hyped funds? You know they are not good for you, but you want to try them anyway!

In April 2012 at the latest the common stock of Facebook will be brought to the official stock exchanges (IPO), so is expected in the market. Uptil that moment people are able to buy stock through Goldman Sachs. Three “buts”:
-   The minimum amount of stock to be bought is 2 million dollar
-   Buyers through GS are obliged to keep the stock until 2013
-   The stock is already 3 times overbought at the moment, so the chance you will get it before the stock is sold at the stock exchange is extremely limited.

The current value of Facebook is forecasted at 50 billion dollar and everybody is extremely enthousiastic about the stock, so this sounds like a no-brainer, right…? It doesn’t!

In The Netherlands around the year 2000, there two similar no-brainers were around:
-   The auction of UMTS claims ( Universal Mobile Telecommunications Systems) in The Netherlands and other countries in Europe.
-   The IPO of World Online in The Netherlands.

Let me explain what went wrong…

UMTS was the new standard for Mobile Telephones, which would provide you with:
-   Mobile Internet with almost unlimited speed
-   Exchanges of pictures, video and realtime “anything”

As this was at the peak of the dotcom bubble, the claim auctions were a resounding success in Great Britain and Germany were they delivered a staggering total amount of about 20 billion Euro. Even in The Netherlands the total amount of these claims was about 2.5 billion Euro.

Smart calculators (like ‘yours truly’) saw dark clouds at the horizon. Let’s do some calculation:

Total amount of mobile phone users in The Netherlands: 5,000,000(?!)
Total claim costs:  2.5 billion EUR
One-time installation costs for UMTS: (approx). 4.5 billion EUR
Annual service costs: (approx): 1 billion EUR

If we look at a timespan of five years the calculation is like this:

2.5 + 4.5 + 5 (5 yrs * 1) = 12 billion EUR / 5,000,000 (mob. Phone users) = 2400 EUR to get breakeven.

This meant that EVERY mobile phone user in The Netherlands should have paid at least 2400 EUR in 5 years to reach breakeven point. At this time no cent with UMTS is earned yet.

Did this happen? Of course it didn’t! And although the smartphones recently started a kind of hype after all, the auction of UMTS almost killed KPN, the biggest phone company in The Netherlands. The profit model was fatally flawed!

The IPO of World Online was also an extreme hype. It was an internet company that would bring broadband internet to the people. Everybody was sure it would change internet as we knew it then, with:
-      new commercial services and products;
-      new possibilities;
-      faster data connection;
-      better quality;

At the time it seemed like the goose with the golden eggs and its founder Nina Brink was the Mark Zuckerberg of The Netherlands. It was calculated at the time of the IPO that the value of stock capital was about 12,000 EUR per subscriber of World Online.

To cut a long story short: Nina Brink sold stock in advance of the IPO, people found this out and the stock fell already on the first day of the IPO to levels below the issue price, to never recover again. All people were angry with Nina Brink and she was blamed for the downfall of the stock. But was this the point?

Of course not: how on earth can you make 12,000 EUR per subscriber with internet. Also here the profit model was fatally flawed!

And that brings me to Facebook:
-   yes, it is extremely popular
-   yes, everybody is using it or talking about it.
-   yes, there are still possibilities for expansion in the world.

Bottomline is, however: how to make money with it?? And not a little bit of money, but 50-odd billion dollar of money?? To get all shareholders break-even?

These are my reasons to call this a bad stock in advance:
-   Facebook can’t make money from subscription fees, because nobody would want to pay for it and there are sufficient free competitors in the market.
-   Facebook can’t make enough money from selling information, because there is too much competion. Their product is not unique enough.
-   They can’t make enough money from selling services (mobile phones, subscriptions etc.), because the added value of Facebook is simply too low to defeat competition.
-   They can’t make enough money from selling advertisements, as a 50 billion dollar advertisement market for one product only looks like a mirage.
-    As all hypes, the hype for facebook will dissappear again behind the horizon.

It is impossible to earn this amount of stock money and that is the reason that the stock will be a rollercoaster ride: a lot of movement and crazy moments, but going down in the end. Do not tell I didn’t warn you.


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