Is There a Facebook Bubble? Reasons To Be Skeptical About Facebook's IPO

Many analysts, commentators, and pundits may be excited about a Facebook initial public offering (IPO) this year, but I must confess, I am not. Despite the prevailing trend, I believe traders, investors, and everyday individuals may want to think twice before jumping on a Facebook IPO bandwagon.

I have to admit that I have always been a bit skeptical and reluctant when it comes to Facebook. Despite how the history of social networking websites played out, I used to consider Facebook secondary to websites like MySpace. Unlike Facebook, MySpace users could take advantage of entertainment, music, and video options that seem to be lacking on Facebook. Even further, MySpace users could have blogs and could set up webpage designs. The text-based video games on Facebook never really caught on for me; I understand that many enjoy them, but I just never really got into them.

From my perspective, even years ago I found MySpace to be a bit more enjoyable than Facebook. It felt like you could do more on MySpace; MySpace seemed much more colorful. But alas, as MySpace popularity has dwindled over the past several years, at least in the context of social media networks, Facebook is to be preferred. These days, a trip to MySpace may feel like an archaeological dig at the remains of a lost community. Unfortunately, for various reasons, like with what happened with MySpace, I think the number of Facebook users dropping off could possibly increase in the coming years.

MarketWatch's Jon Friedman had an interesting article Thursday on how Facebook has jumped the shark. As Friedman so eloquently put it, "Facebook has now officially jumped the shark. The phrase originated after Fonzie, clad ridiculously in a swim suit and his trademark leather jacket, water skied over shark-inhabited waters on an episode of ABC's beloved 'Happy Day' series." Thus, "jumping the shark" reflects a moment in a television show or any other popular (usually media-based) phenomenon where the phenomenon has reached a climax owing to a lack of original or creative ideas.

Friedman contended that owing to Facebook's "endless, useless tinkering" on its home page and "empty bells and whistles" designed to "modernize the site in advance of what Wall Streeters figure will be the Woodstock of initial public offerings", Facebook appears to have jumped the shark. Nevertheless, Friedman wrote that Facebook "is pretty great just the way it is, and doesn't have to change a thing" to keep him happy. Friedman wrote that he loves Facebook, it's just that he just hopes "that the management doesn't screw it up".

Friedman's comments reflect an idea that I have had for some time: The Facebook phenomenon may be acting as a financial bubble. Going along with the respective fates of MySpace and Friendster, social networking websites have come and gone over time in what appear to be temporary fads. Whereas Facebook appears to have weathered the storm and ascended to the peak of social networking websites, Facebook remains the "gold standard" of social networking websites. Comedy Central's South Park even went so far as to compare Facebook to the stock market where Eric Cartman had a show called "Mad Friends" akin to Jim Cramer's "Mad Money" -- stock prices are akin to the number of Facebook friends an individual has. The question then becomes, "Will Facebook always remain the 'gold standard' of social networking websites?" The answer to that question remains uncertain, and in that sense, traders and investors may want to be wary of Facebook's IPO.

One cannot help but feel that the optimal time for a Facebook IPO was in the distant past. Perhaps at some point between early spring of last year to the recent time period of Groupon's or Zynga's IPO would have been the best time for Facebook to go public. Though Facebook's revenue has increased substantially over the past several years, it may become difficult to see how the fate of Facebook could be any different than the fates of MySpace and Friendster.

MySpace had surprisingly made a return in the news in 2011 as Rubert Murdoch's News Corp NWSA sold the MySpace website to a US advertisting agency teamed up with Justin Timberlake for $35 million -- a mere 6 percent of what News Corp paid for the website. The Telegraph reported Friday that Murdoch posted a message on Twitter that his company "screwed up MySpace in every way possible". Telegraph: "MySpace has been bedevilled in recent years by confusion over its strategy and, according to analysts, failed to innovate at the pace required. Its user numbers peaked at 73.6 million in October 2008 and has since shrunk to sub 30 million." In comparison, today Facebook boasts 800 million users.

In taking a look at the recent growth in the number of Facebook users, one cannot help but feel that Facebook could be growing akin to a financial bubble. Growth in Facebook may even reflect shades of irrational exuberance. In this sense, all bubbles need a climactic point...a peak...some sort of trigger (if only psychological) to bring down the value suddenly. From Friedman's perspective, this climactic point may have come in new website changes and features. That being the case, the emergence of Google+ GOOG may also play a role in a possible Facebook bubble-bursting.

Aside from new features and Google+, I think a substantial trip-up for Facebook occurred as news came out in late 2011 regarding how Facebook tracks users across the web. From USA Today Nov. 16, 2011: "In recent weeks, Facebook has been wrangling with the Federal Trade Commission over whether the social media website is violating users' privacy by making public too much of their personal information. Far more quietly, another debate is brewing over a different side of online privacy: what Facebook is learning about those who visit its website."

The element of online tracking adds a precarious new dimension to the Facebook phenomenon. Facebook users may be perfectly comfortable in posting pictures from vacations or social settings and comfortable in publicly commenting or posting videos and music on their Facebook page, but for some users, the line may be drawn on fears of online tracking. Users may enjoy Facebook for connecting with their friends, but they may also be skeptical of being monitored by Big Brother Zuckerberg every time they go online.

In the aforementioned article, USA Today noted that "Facebook is under intense, conflicting pressures. It must prove to its global financial backers that it is worthy of the hundreds of millions of dollars they've poured into the company, financial and tech industry analysts say." According to USA Today, these investors include companies like Microsoft MSFT and Goldman Sachs GS. That being the case, the specter of online tracking could potentially turn off many Facebook users thereby bursting a possible Facebook bubble. In this way, the optimal time for a Facebook IPO may have been in the recent past.

On Thursday, the Associated Press' Judy Lin had an article claiming that California "stands to reap hundreds of millions of dollars in capital gains taxes from Facebook investors and employees profiting from stock transactions" as a windfall. Given the California state government's $9.2 billion deficit, this windfall from a Facebook IPO will most likely be welcomed. Lin noted that a legislative analyst from California said that the company could issue $10 billion worth of stock. The phenomenon has been dubbed "The Facebook Effect". Lin: "There has been widespread speculation that Facebook's IPO might value the company at more than $100 billion." Regarding when Facebook might go public, venture capitalist Gadi Behar commented that Facebook "could go public within two months, but he said he could not be certain about a specific timeline".

It is significant to note that Facebook does not appear to be like MySpace. To say the least, MySpace did have some issues. Though it may it sound far-fetched today, perhaps Facebook can solidify its cultural status in the future by way of an alliance with a company like Yahoo! Inc. YHOO or Time Warner Inc. TWX in order to create formidable competition against Google Inc. with Google+. Even further, from my experience, it would appear that Facebook instant messaging has effectively replaced AOL instant messaging -- as such, Facebook has a lot going for it. Facebook could even possibly expand to having a magazine or its own cultural online/cable channel akin to what MTV used to be.

It could just be me, but I do think that Facebook either has reached or is approaching a pinnacle and crossroads of sorts. I could be wrong, perhaps in the future, everyone on the planet will have a Facebook account and the social networking phenomenon with Facebook as the gold standard will continue indefinitely. Nevertheless, if users become weary of the website or individuals en masse begin closing their Facebook accounts with privacy concerns as the fad wanes or interest stagnates, then Facebook's bubble will burst at some point. Even so, aside from Google+, there does not appear to be any immediate competitor rising up to take Facebook's place.

Unlike a website like LinkedIn LNKD that relates to one's labor, Facebook does not appear to have any direct personal or occupational hook (in the spirit of self-interest) to keep users coming to the website. Whereas Facebook has social appeal and LinkedIn has professional/occupational appeal, Facebook would appear to lack a sense of professional self-advancement -- but I am sure that point could be debated.

Don't get me wrong, a Facebook IPO could very well be an excellent and advantageous opportunity for traders and investors. That being the case, given respective unknowns and uncertainty, a trader may want to avoid a Facebook IPO altogether. One has to wonder whether Facebook is a long-term cultural mainstay or simply another fad akin to MySpace. Even with more features, fresher looks, and innovation, one has to wonder if Facebook's popularity will continue. Is Facebook a temporary fad? Could the social networking website phenomenon itself be merely a fad? Might users become wary as their entire lives are tracked on Facebook? Of course, the crux will be if users begin shutting down online social network profiles altogether. Individuals in the near future may want to reconnect with our common reality outside of cyberspace -- thereby drying up the market for online social networking. If setting up Facebook profiles can become cool, might shutting down Facebook profiles one day become the popular thing to do?  

Despite differences in the respective websites, given what we have seen with MySpace, Friendster, and even the drop-off in Blizzard's World of Warcraft ATVI, suffice to say, even in approaching one billion users, I am still a bit skeptical about Facebook.