Tag Archives: IPO

Will You Lose Your Job Because of Facebook?

This is not about your indiscretions which might show up in human resources. Yes, those are important, but this is about the very existence of the company you work for.

“But I work for a huge, stable company.” If you believe that you are safe then you do not understand how the stock market works.

Several years ago when politicians attempted to buy stock with social security funds, liberal cried, “risky scheme.” The current Social Security has no risk factor at all. Politicians spend the money as fast as it is collected. It guarantees that the money will not be there when it is needed.

The United States is in a desperate financial condition. If you do not understand that, the rest of this blog will make little sense to you. The federal government has borrowed more money than it can possibly repay. Private funds have nothing valuable to invest in. Unemployment is far higher than the government will admit. The government has to cook the books to hide the reality of the situation. The same is true for inflation.

Desperate to make a profit, large Wall Street investment firms are taking immoral risks and getting caught. With the failures of the Federal Government and traditional Wall Street investment firms, investors turned to a non-traditional source of income to seek profits in Facebook.

Investing means taking some of your money and saving it. You can do one of two things with your savings; hide it (put it in a mattress, safe deposit box, buy gold, etc.) or attempt to make more money. This attempt to make more money is known as investing. You can put your money in a traditional savings account with lower returns but relatively safe investments. You can also buy bonds, another traditionally safe investment with low rates of return.

But the largest and most common long-term investment instrument is a stock certificate. Both Albert Einstein and Stephen Hawking were told by their publishers that they would lose half their audience every time they used a formula. Following that sound advice, there will be no accounting here.

A stock certificate is legal ownership of a company. While there is a lot of hoopla surrounding an IPO (Initial Public Offering), you must realize that an IPO is selling the company. Most people understand selling a car or house. When the deed or title is transferred, they have the money but not the car or house. A stock certificate, however, is only part ownership. Since stocks can be structured so many different ways, something simple might help us understand.

A man gets married. He has lived at home and worked on a farm his entire life. He wants to move out of the house and start his own farm. He convinces ten people with money to invest in a very small, completely equipped farm. They are not just giving him money. They are lending him their retirement funds. They need the money back but not for a few years. Each of these ten people gets a single stock certificate. To make the illustration very simple, whatever profits the farm makes when it harvests and sells it crops will be split 50/50. The farmer will keep 50% and the ten investors will each get 5%. So in this example, if the farm made $200,000 the first year, the farmer would keep $100,000 and each investor would get $10,000. This is similar to the way the real world works. The capital equipment, such as the land and tractors, would be purchased with original investment funds. Ongoing expenses, such as tractor repairs and diesel fuel, would be paid for out of the farmer’s share of the profits. As long as the investors keep their stock, they will continue to get 5% of the profits.

The risk is that if the farm does not make money the investors do not get paid. Every day companies fail and the investors lose their investment. Most people invest in some type of mutual fund where they buy shares in a lot of different companies. If most of the companies you invest in are profitable, it does not matter if one or even a hundred companies fail. If those profits more than offset the failing companies, you still come out ahead.

This is where Facebook comes in. We have a failing economy, a failing federal government, and failures on Wall Street. Facebook was the largest IPO ever. Though the IPO took place 5 days ago, there is still disagreement as to exactly how many billion dollars Facebook raised. The price per share was based on the number of shares issued and the amount of income Facebook is expected to generate. Unlike a farm, which harvests and sells a tangible product, the only income Facebook has is advertising revenue. It makes estimating income very difficult.

The billions of dollars invested and lost in Facebook were taken from other companies. Where did the money go? On a farm, money is spent on tractors, land and seeds. In a tech company, the buildings and equipment often have little value to anyone else. The capital investments are often in salaries of tech savvy employees and highly specialized equipment. However, in Facebook’s case, the money the original investors lost is not gone until the investors sell their stock. Facebook as a company has spent some of the initial investment. If Facebook uses that money wisely and eventually pays large dividends, then everyone who invested in Facebook will be paid back. The only people who lose money are the ones who sell while the stock price is low.

Facebook is pointing out Amazon.com as an example. Amazon’s IPO opened at $18 per share and fell to around $1.50 per share. Amazon went public in 1997 and failed make a profit until 2001. It is now up to $217 per share. However, Amazon sells stuff. It is easier to evaluate how well Amazon is doing by looking at what and how much Amazon sells. Facebook has a huge audience, but how much of that audience buys products Facebook advertises?

Our little business advertised on Facebook. Our tracking showed zero results from our Facebook advertising. GMC just canceled Facebook advertising last week for similar reasons. Facebook advertising does not work. Of course, Facebook can turn things around. But at this time, Facebook stock is worth less than half of its IPO opening price.

Most people are realizing that Facebook was oversold. The IPO price was inflated. No one can explain how the price came to be what it was. This is still being analyzed, but whispers of impropriety, dishonesty, and serious misconduct are becoming shouts.

At this time, Facebook is looking more like Netscape. The browser with more than a 90% market share in the mid 1990s now has less than a 1% market share. Netscape was sold and investors lost almost everything.

The difference between Facebook and Netscape is that Netscape failed in a strong economy. The money invested in Facebook was pulled from other businesses. If Facebook fails, or even just loses a lot of money, other companies will not have the money to meet their payrolls.

Combined with the other problems the US has, it just might be the perfect storm to bring down the US economy.

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