4 Things That Could Damage Facebook’s IPO

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According to CNBC, Facebook will launch its IPO in the first quarter of 2012.  Somehow, this was supposed to be a scoop.  Yet this timeline has been fairly well-known for months.  Then again, in light of the huge success of the LinkedIn (NYSE:LNKD) offering, many investors are hungry for a Facebook deal.

At the same time, CNBC also indicated that the IPO could have a value of $100 billion.  Again, this isn’t big news either.  Keep in mind that Facebook shares are suggesting a market cap of $85 billion in the secondary markets.  If anything, the $100 billion figure looks low.

While I agree a Facebook IPO is likely to be enormous – and a worldwide event – there are still some risks.  The social networking industry can be fickle. 

So what could go wrong?  Let’s take a look at some possibilities:

Economy:  In the U.S., growth is slowing, government debt continues to remain high and unemployment continues to be a big problem.  The Federal Reserve has also indicated it will not continue to print money to buy bonds.

Europe also is looking shaky, especially in light of the debt problems in Greece and Spain.  There are even issues in Asia.  For example, China is showing signs deceleration as well as higher consumer inflation.  In fact, the real estate bubble may be bursting.

Basically, if the world economy has a hard landing, the impact will be severe on equities, even for top companies like Facebook.  After all, a big slug of its revenue comes from advertising.  And these are easily cut during economic downturns.

User Fatigue:  As the social network gets bigger, the growth rate will inevitably get muted — there are signs this is already happening.  Consider a recent report from Inside Facebook, a news and analysis site that focuses on the company’s developments.  According to its data, Facebook had 11.8 million new users in May, which was down from 13.9 million in April.  There was even a decline of 6 million users in the US, as well as falloffs in Canada and the U.K. 

Perhaps users are getting a bit tired of Facebook?  Maybe they are using rival services?  Remember what happened to Friendster and MySpace?

Privacy:  This is a serious vulnerability.  With more than 700 million user profiles, Facebook is a treasure trove of personal information.  And, as the company becomes publicly traded, there will be immense pressure to monetize things. 

No doubt, the Federal Communications Commission is already scrutinizing things.  But there are also investigations from other countries. 

Ultimately, if there are more onerous regulations, it could stifle growth and the user experience – just when Facebook will need to find ways to keep up the momentum to placate voracious investors.

Hack Attack:  So far this year, there has been a rash of security breaches.  Some of the targets have included Citigroup (NYSE:C), Lockheed (NYSE:LMT) and Google (Nasdaq:GOOG).  Perhaps the most crippling was against Sony’s (NYSE:SNE) PlayStation, which had to be shut down.

 No doubt, Facebook would make a juicy target for hackers.  True, there have been no major issues yet.  But all it takes is one breach to cause a big problem.  Just imagine if it happened during the time of Facebook’s IPO, right? 

Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.”  You can find him at Twitter account @ttaulli.  He does not own a position in any of the stocks named here.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2011/06/4-things-that-could-damage-facebooks-ipo/.

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