Facebook IPO Date Approaches: 5 Reasons You Shouldn't Buy Stock

Opinion

on May 15 2012 3:38 PM

The moment is upon us: Facebook, the world's biggest social network with 900 million-plus users, is finally ready to make its Wall Street debut on Friday, May 18, 2012. The Menlo Park, Calif.-based company has experienced plenty of controversy during its eight years of existence, from the Winklevoss lawsuit to questionable redesigns and privacy breaches to hoodiegate, and yet, Mark Zuckerberg's social experiment continues to attract users and investors.

Facebook is clearly dominant in its niche, but buying stock so quickly might be unwise. In fact, even though underwriters look to price Facebook shares between $35 to $38 apiece, there are several troubling risk factors associated with the world's largest social network. In its SEC filing, Facebook outlined 35 risk factors that could materially and adversely affect the company; the list reveals some troubling facts, including Facebook's lack of sustainability and its dependency on others to operate.

Facebook mentions how users could turn their noses up at new products or features on the site, as well as the danger of patent and copyright lawsuits, the threat of malware and viruses, and how people could sue Facebook for any kind of content, including defamatory content, or infringements on intellectual property or copyright. Yet, Facebook has dealt with many of these issues before, and has come out the other side completely clean. While Facebook also says it is largely dependent on third-parties for their data, this is also not a big source of worry: Many of the world's biggest companies outsource their data, and even though Facebook is building data centers, Zuckerberg is keeping a nice balance.

However, there are some very notable risks involved with buying stock in Facebook. Here are five reasons why you shouldn't go buy Facebook stock right away:

1. Facebook's mobile platform doesn't show ads; the more the app grows, the worse for Facebook.

This might initially seem like a minor issue, but it's actually quite major. Even though most users currently take to Facebook's website, that will likely change within the next five years. More people are going mobile than ever before, thanks largely to the soaring popularity of smartphones and the advent of tablets -- well, the iPad, at least. Zuckerberg even admitted that if he built Facebook now, he would have built it solely as a mobile application.

Yet, Facebook's mobile app sacrifices a great deal of money for the sake of beauty. But more ads -- or any ads -- aren't necessarily the answer either: In fact, a new poll from AP and CNBC revealed that most Facebook users rarely interact with the ads on Facebook's website, and the fact that Facebook relies on user data to choose and place ads to leverage revenue actually results in a great deal of distrust.

Mark Zuckerberg once said that if he built Facebook again from the ground up, he would likely build it exclusively as a mobile application. Zuckerberg clearly sees the future is mobile, but this could have dramatic consequences on the company's revenue: If Facebook decided to introduce adds to its mobile apps, fans would be extremely upset. Ads not only take up precious real estate -- which is needed to pull off beautiful designs with neatly-packaged data -- but they interrupt the overall experience. Users enjoy brands that respect their audiences enough not to bash them with pop-up ads; if Facebook is forced to do this for the sake of staying afloat, it could prove extremely costly to the company's stock and general outlook.

2. The competition from Google, Twitter, and other social networks around the world could heat up.

Let's make this clear: Facebook is not the first social network -- that would be e-mail, ladies and gents -- and it sure as hell won't be the last. MySpace probably thought it was the ultimate social network, and we all know what happened there.

It's amazing that Facebook has transformed from a pasttime to a natural part of our daily routines, and even our businesses, but it gets better than Facebook. Much better.

Despite attempts from Google and Microsoft to create their own social networks, the one true threat is Twitter, which provides a distinctly different but valuable look at our social world. Twitter's most recent redesign in October was a tremendous move for Jack Dorsey's microblogging network, but it could get even significantly better with an improved search engine and less emphasis on Justin Bieber.

But besides the existing social networks, betting on Facebook is also betting against the prospect of someone creating a better idea than Facebook. Even now, Pinterest is getting tremendous traction, and sites like EveryMe are taking new approaches to sharing information with the world. Facebook may be the biggest social network right this second, but in this ever-changing space, it's almost a better idea to bet on the field.

3. Zynga accounts for 12% of Facebook's revenue. If the companies ever parted ways, it could seriously hurt Facebook.

Talk about scary. Zynga, which has gotten into the recent habit of buying companies it doesn't like, is a major driver of Facebook's success. In other words, a carrot in FarmVille is worth about a karat in real-life, at least for Facebook.

Dependence on any one brand is dangerous, but it's particularly hazardous when it's Zynga, whose reputation as a demanding group led it to fall flat when it went public in December. 

Zynga did perform well in 2011: The company had four games in Facebook's Top 10 Games of the Year, with 60 million daily active users -- and 269 million monthly active users on Facebook alone -- spending a total of two billion minutes per day playing its various games. 

In four years, Zynga has grown from nothing into a company that now has 2,000 employees and produces exceptional work, said Jeffrey Katzenberg, the head of Dreamworks Animation and a prominent investor in Zynga. It's become one of the greatest gaming companies in the world.

But again, it's best to bet on the field. Recently, Zynga was slammed for stealing the idea behind the iPhone Game of 2011, Tiny Tower, creating its own version called Dream Heights. Gamers and users see right through Zynga's actions, which are all about success now but not about creating original, fun and addictive gaming experiences.  

If Zynga continues to harass its own workers and bum ideas off apps with less money and intellectual property protection, the company will go down in flames. Facebook may be forced to part ways with Zynga, but then, where would it turn? Either way, Facebook would need to make up 12 percent of its revenue if it gave Zynga the boot, but how would it make up? This uncertainty is a major issue going forward for Facebook.

4. Our revenue grew by 88% in 2011, which is simply not sustainable, according to Facebook. Growth is bound to decline.

It's simple physics: What goes up, must come down. Since 2004, Mark Zuckerberg and Facebook have been on a rocket ship, gaining hundreds of thousands of users each day while making tweaks to its successful formula for sharing content with friends. But this tech bubble, which greatly expanded when Facebook poured $1 billion into Instagram, is going to burst, and it may happen upon Facebook's IPO.

Facebook had an incredible year in 2011, but the company also introduced several important partnerships and features. Besides Facebook Timeline, which debuted in September, Zuckerberg also struck deals with several prominent companies in a new feature he called The Social Graph, where companies like Nike, Spotify, and even The Washington Post could get involved by leveraging their services into a mini newsfeed, so users could see what their friends were listening to, what they were reading, or where they were running.

The only way to expand Facebook's business is to involve more companies into this Social Graph, but it seems like Social Readers like the examples above, which send information about the Facebook user sans approval, are failing. If Facebook can't get users to leverage other businesses on its site directly, the company needs to find another way to generate revenue. 

5. If Facebook loses its leaders, like Zuckerberg and COO Sheryl Sandberg, that could be very destructive. Zuckerberg, in particular, has a massive amount of shares, which concentrates the power in the hands of one man.

Mark Zuckerberg only earns $1 in salary from his own company (according to his SEC filing), but he's by far Facebook's biggest stakeholder with 533.8 million shares, or 28.4 percent of the pot, as well as 56.9 percent of the voting power in his company. COO Sandberg owns 1.9 million shares, or 0.1 percent of the company; if both Zuckerberg and Sandberg both left the company and Facebook gets valued at $104 billion, about $30 billion would exit along with them.

But that wouldn't be all; if the brain of Facebook left, the body would simply collapse. This isn't like Apple, where Steve Jobs had plenty of time to imbue his company and employees with his own set of values and principles; Facebook's success is inherently tied to Zuckerberg, and if one goes, so does the other.

Sandberg is also becoming a valuable piece of Facebook's puzzle, and while her departure would be sorely missed, she could be eventually replaced. But not Zuckerberg. Despite the missteps he's taken over the last eight years, Zuckerberg's project is a wild success because of his efforts, and he could easily be the country's greatest and youngest CEO. Yet, Facebook users must live with Zuckerberg's shady side, the same side that was unearthed in the 2010 film The Social Network, the side that also refuses to bow to authority, or at least wear a suit and/or tie in the presence of authority. Zuckerberg has, and always will have, a f*ck you attitude, and while it's what makes Facebook great, he could without a doubt pull a plug on his own operation at any time, simply by walking out the door.