MoneyWeek Roundup: Steer clear of Facebook

● There have been some big economic headlines out this week. Like yesterday’s US non-farm payrolls report, which showed more jobs being created – and shorter dole queues – than expected.
But while that’s important for stock markets, the biggest piece of investor frenzy was caused by talk about one company’s trading debut. Again in the States, Facebook said it would list it's shares this year.
There’s no doubt it will be a big success, says John Stepek in Thursday’s Money Morning. But “I still won’t be buying in”.

There are lots of reasons why a Facebook IPO will succeed. Google and Apple have proved that “big flashy tech stocks” can deliver for investors. Facebook is a big name, so it attracts a lot of interest. “The US Securities and Exchange Commission’s website almost crashed yesterday as it was overwhelmed by traffic. This listing has been a long time coming, and lots of people want to get in on it.”
Even the fact that founder Mark Zuckerberg and his close allies will retain control of the company with almost 60% of shares isn’t necessarily a bad thing, says John.
After all, “this is what you get with visionary technology companies. Google has the same sort of structure. And I’d rather buy stock in a company led by a highly committed, heavily invested founder who cares about his creation, than one that’s been hijacked by employees who only care about their next pay packet (yes, I’m talking about the banking sector)”.
● So why won’t John buy in? “Because investing is not about taking monumental punts on companies which you only vaguely understand. It’s about forming a clear understanding of the risks and rewards involved in buying a company, then deciding whether there is enough potential reward to make taking the risk worthwhile.” And for John, Facebook doesn’t fit those criteria.
Facebook is already looking very expensive. Private stakes have already swapped hands among the Silicone Valley investment fraternity and that’s pushed up the price. For Facebook to match Google’s post-IPO returns it would have to become the world’s first $700bn company.
“If you buy Facebook for the long run, you’re betting on its ability to make an awful lot more money than it already does, in order to justify its valuation. Given that there are a lot of well-established tech stocks that already make plenty of money, and sport a much lower valuation – such as Microsoft (US: MSFT), or even Apple (US: AAPL) – I don’t see that the risk / reward balance here is attractive.”
Indeed, my colleague Phil Oakley thinks Apple looks far more inviting for investors: Forget Amazon – buy Apple shares instead.