Stop Hating Facebook -- Hate Your Mirror
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It never ceases to amaze me to see how childish Wall Street can be sometimes. The mess that it created surrounding the IPO of social media giant Facebook (NASDAQ: FB) will go down in history as one of the worst investment gaffes of all time. But that not to say it makes Facebook the worst company of our generation. For that matter, if we go back to the dot-com bubble, we can probably agree that Facebook is not even the worst IPO of our generation. How quickly we forget the strong fundamentals (sarcasm) of Webvan, Pets.com and eToys.
When it comes to Facebook, you either like it or hate it – there is no in-between. Nonetheless, that the company is still standing today after a 50% drop from its IPO high is a testament to not only its underlying business, but also the long-term potential that still exists. But some see it differently.
Instead, what you often get are the doom and gloom predictions and the righteous anger from those wanting revenge – not realizing that they were burned by their own greed. Losses that were accumulated were not the fault of the company. For the one to blame, investors need to look in the mirror.
As with the dot-com bubble, sentiment surrounding Facebook took a hype-filled life of its own. But that is not to be mistaken with the idea that the company somehow caused this. In fact, I don’t think Facebook necessarily did anything wrong other than not making everyone rich as it was expected to do. But again, this was the fault of investors ignoring the company’s warnings about realistic growth expectations.
In other words, despite what should have served as red flags which disclosed the company disclosed in its S1, investors decided to make up their own minds – as if to say nothing is going to ruin our party. However, they arrived to the party too soon and left too late – all while failing to appreciate that the company really is, what it offers, and what it can realistically be. Because for as much as the company is loathed, investors still do not fully grasp how the company makes money.
Some still make the mistake of thinking that Facebook's user base is its customers, when in fact they are the product that is being sold. Granted, the company is experiencing some growing pains both literally and figuratively. While its recent second-quarter earnings report demonstrated some decent growth to the extent of 32% quarter-over-quarter, it paled in comparison to the 44% growth it enjoyed from Q4 to Q1. That notwithstanding, the company did beat in revenue while also growing its subscriber base to 955 million.
This is where Facebook is able to make money: the potentially 955 million pairs of eyes that can be sold to companies looking for a decent return on their advertising dollars. This is Facebook’s business. Its challenge is to prove to the world, and more importantly to the advertising community, that its model is effective not only on traditional desktops, but also as technology transitions to the realm of mobility. That is its true challenge and one that it must overcome if it indeed wish to be around for the long term.
The good thing for Facebook is that it is going to have plenty of help. That Apple’s (NASDAQ: AAPL) new iPhone 5 and IOS6 seamlessly integrate Facebook certainly works in its favor. Apple clearly wants a piece of social media – if nothing else, to help Facebook topple their mutually hated rival, search giant Google (NASDAQ: GOOG). While I think Apple is taking some security risks by “friending” Facebook, I think it sees the benefit of having potentially 955 million users someday all wanting iPhones instead of the Android alternative.
How all of this plays out remains to be seen. But as Facebook continues to be punished for the mistakes of investors, a bit of perspective would point out that it has not been alone when it comes to disappointments in social media stocks. Yelp (NYSE: YELP), Groupon (NASDAQ: GRPN) and Zynga (NASDAQ: ZNGA) have not exactly lit the investment world on fire as their respective optimism once suggested. In fact, I've been on record as saying that Groupon will likely file for bankruptcy within a year as questions start to mount about its fundamentals. Or more specifically, does it have any? Yet it seems it gets more respect than Facebook. It doesn't make sense.
The bottom line is that Facebook is not going away and investors need to start dealing with this reality. It’s time to let the bitterness evaporate and embrace the obvious lesson that this entire experience teaches – there is no such thing as a sure bet. And whenever something appears too good to be true – run. While these are not novel lessons, too often they are forgotten on Wall Street only to then play the blame game.
Those still hating Facebook would help themselves better by actually buying the stock at current levels because it just might have recently bottomed. And in the meantime if you are looking for someone to hate for your investment mistakes, look in the mirror and introduce yourself.
Know what you own
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rsaintvilus has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, and Google. Motley Fool newsletter services recommend Apple, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.