It can be easy to dislike Facebook Inc. as a social media site. The inanity of so many of the comments can make it look like a passing fad. And with many consumers growing increasingly alarmed about online privacy issues – in particular, advertisers knowing everything about you – social media sites seem to be on the wrong side of an impending backlash.
It is also relatively easy to dislike Facebook as a stock. The company is moving toward an initial public offering, which will see the stock trading on the Nasdaq this month. For all the company's success, you would be blind not to see the downside here: Facebook is led by a 27-year-old chief executive who wears a hoody (worrisome), sales growth slowed in the first quarter and earnings fell (not so good) and the shares could start trading at 100-times earnings (a bubble-like valuation).
However, taking a skeptical view on Facebook has become so prevalent that maybe it's time to get skeptical about the skepticism. Here are three reasons to give the stock a chance.
1. The air has already been taken out of the social media bubble.
LinkedIn Corp. , Groupon Inc. and others have already gone public, with much fanfare. What's more, they now provide investors with a track record for what social media stocks can do – and the mixed reactions suggest that there might not be a lot of froth in the sector.
LinkedIn began trading nearly a year ago. While the shares are up nearly 150 per cent from their offering price (which few investors get access to), it took them until March of this year to move meaningfully above their first-day closing price. Meanwhile, Groupon's shares are sitting 50 per cent below their offering price.
2. Google Inc.
Facebook is being compared to the search engine largely because it is the most anticipated IPO since Google went public in 2004. But there are other apt comparisons: Both dominate their sectors and had hugely successful track records prior to listing. And like Facebook, Google also raised alarms over its heady IPO valuation: The shares were priced at 118-times trailing 12-month earnings.
Despite reservations about Google's valuation, anyone who missed out on the stock in those early days missed out big: The shares debuted at $85 and were never again so low. By the end of 2004, they flirted with $200 and now trade at more than seven-times the IPO price.
3. The stock market has turned rocky.
Companies love to time IPOs in their favour. In the case of Facebook, the company might still be a darling of the social media sector, but it is set to start trading on the open stock market at a turbulent time for stocks. Concerns about Europe, China and the U.S. economy have raised concerns that major indexes are set for a rough patch. Some observers even believe that the United States is heading for another recession, following Europe's slump.
New stocks can have an easy ride during bull markets, but the going is considerably harder when bull markets are threatened. In other words, Facebook shares are set to debut in an uncertain investing landscape – and that's not such a bad thing for cautious investors who tend to stay clear of hype.