With just over 10 odd days remaining for the Facebook IPO to
open, there has been lots of news around the public offering like what would be
the valuation, how advantageous would it be to invest in here, the company
acquiring Instagram, employers asking for FB password of prospective employees,
youngsters deactivating FB accounts after realizing that they are losing touch
with “real life” etc. Each of these news hold tremendous influence on lots of
things related to the IPO. However, no matter how interesting these might have
been for reading, in my opinion, the most important thing that a prospective
investor needs to learn about are the risk factors that Facebook itself has
outlined in the IPO prospectus.
1) Despite its
growth in recent years, the number of Internet users in the world is finite.
The number of active monthly users on the social networking site is 845 million
monthly, but FB warns that this growth rate will slide "as the size of our
active user base increases, and as we achieve higher market penetration
rates."
If Facebook
can't retain users and their attention, then advertising could also peter out.
Yes, remember Orkut? How hooked on you
used to be? Now, do you even check your Orkut account?
2) Facebook is
already restricted in China, Iran, North Korea and Syria. Other countries can
follow suit; you never know. Remember, Kapil Sibal? No. Then, West Bengal
Government involving the CID to investigate posting of allegedly controversial
material against the Chief Minister on Facebook! Logic and rationality can
vacate any “market” without any prior notice.
Hence, the company warns that in such a scenario their competitors can
successfully penetrate those geographic markets that they cannot access.
3) Facebook is
subject to laws governing a litany of issues including privacy, intellectual
property, data protection and these laws are always evolving. Any slight change
in these laws can hurt Facebook's business.
4) Zynga, the
online gaming company behind the popular games on FB like Farmville, Cityville,
etc, accounted for 12 percent of Facebook's revenue in 2011. It also generated
considerable Web traffic for the social network. Facebook’s earning would take
a hit if Zynga’s games became less popular, or if Zynga launches games on
competing platforms. In fact, Zynga has launched its own platform earlier this
year to decrease its dependence on Facebook.
5) Facebook has
become an integral part of our life and people believe in instant sharing of
information than waiting to log in to our accounts after they have access to
computers. Hence, users are increasingly opting to log onto Facebook through
mobile phones, and many of these devices run Google's Android and Apple's iOS.
These are the operating systems controlled by two of Facebook's competitors.
So, any "changes in such systems that degrade our products' functionality
or give preferential treatment to competitive products could adversely affect
Facebook usage on mobile devices," Facebook warns.
6) Before the IPO,
CEO Mark Zuckerberg's shares give him 57 percent of the voting power. Even
after the IPO, his stake is not likely to go down significantly because of
Facebook's ownership structure. The company's success rests largely with
Zuckerberg, but so much control in the hands of one man may be cause for
concern to investors.
7) As an Internet
company, Facebook expects to be involved in "expensive and time
consuming" patent lawsuits, often with "non-practicing entities"
which sue Facebook to extract a settlement. "We presently are involved in
many such lawsuits, and as we face increasing competition and gain an
increasingly high profile, including in connection with our initial public
offering, we expect the number of patent and other intellectual property claims
against us to grow," Facebook says.
Investing in FB is not going to be any different from
investing in any other company. You just need to keep a tab on what’s trending
on the social networking front and what the dot.com (as well the tech) world is
abuzz with.
