Now that the new Facebook movie is coming out, even more people are going to be clamoring for information about just what Facebook is, what the Facebook company is like, and, of course, how to invest in Facebook.
The catch is, there is no Facebook. Not a Facebook company you can invest in at least. Should savvy investors be looking to buy Facebook stock when they can?
Investing In Facebook
Let’s start with the basics.
When most people think of stock, they think of the stocks that trade on the major stock exchanges like the New York Stock Exchange. The companies that trade their stocks here are called publicly-traded companies, because shares of their stock are bought and sold on public exchanged like the NYSE, AMEX, and NASDAQ. There are also many companies, both big and small, that do not have stock shares that trade on the public markets. These companies are often referred to as privately-held companies, although that is not always a technically accurate decision.
Facebook is NOT a publicly traded company. There are no Facebook shares of stock to buy on the NASDAQ or any other public stock exchange. That means that there is no way to use your brokerage account to buy stock in Facebook.
Technically, if you wanted to — and a lot of people do — you CAN buy shares of Facebook on certain boutique exchanges that allow people who own shares of the privately held Facebook to sell them to other people.
There are some very important things to understand before running off and trying to find one of these Facebook stock markets.
First, as a private company Facebook has no obligation to release ANY financial information of any kind. Everyone knows that Wall Street likes companies to massage their books a little bit to make things look good, but Facebook doesn’t even have to share THAT kind of data. Anything you have heard about the company is either, rumor, second-hand, or at the very least, unaudited and unverified.
How Is Facebook Valued At Billions of Dollars?
It won’t take you long to find a news story or blog post or financial analyst staying that Facebook is “worth” billions of dollars, or that the valuation of Facebook is billions of dollars. However, that number is in large part, a guess.
Typically, a company’s valuation is the current price per share of its stock times the number of share of stock outstanding. In other words, the number of shares times the price per share.
Since Facebook does not have a publicly traded stock, this number can’t really be used. But, remember those private exchanges where Facebook shares can be sold by Facebook insiders? There is a price per share when company stock is sold on those exchanges, and one could, multiply that number times the number of shares of Facebook there are to get a market valuation.
Is that a real value?
In a word, no.
Consider that these markets are highly illiquid. There simply are not that many shares offered at any one time, and there are not that many buyers at any one time. That means that the prices set on these exchanges are the price of a limited commodity with a limited pool of buyers. This is NOT the same thing as the public markets.
What is Facebook really worth?
Until the company goes public with a Facebook IPO, nobody really knows. Even then, the publicity and popularity of the company coupled with the number of people who think that the company is a good investment, no matter what any numbers say, all but ensures that the company will start with a bang. A high per-share IPO with a fast price increase in the opening days is all but assured. After that…
There is one thing that people should start thinking about when they are racing to attach these huge numbers to Facebook’s value. The company has not gone public yet.
Despite huge demand for the shares, and investors lining up to snatch-up pre-IPO shares, the company has not even made the most basic steps toward going public. The optimist would say that the company is waiting for the right time. A more realistic look might wonder if the company CAN go public without losing the mystique that makes it valuable.
Consider that many Facebook investors, including venture capitalists and early-stage angel investors, both of whom like to cash out as soon as possible, have been invested in Facebook for a very long time. Consider also that numerous large investments have been made over the last few years, often in exchange for big ownership stakes or very preferential treatment. Consider that Facebook just passed 500 million users and that many in the tech industry are wondering if Facebook is set to be a Google killer.
You have to wonder, what else could the company need?
The answer may very well be MONEY. Until recently, Facebook wasn’t focused on revenue, and often said so. Now, the company sells advertising and has released its Facebook Credits system to generate revenue from the Facebook website. As a private company, nobody knows how big those revenues are, or where they come from. The answer might not be a good one.
It seems that Facebook going public is inevitable in the near future, but for now, there are no moves in that direction. Perhaps the company simply needs longer to pretty up its balance sheet, or it just needs more time to grow its revenues.
Whatever it is, one thing is clear. If Facebook’s investors thought they could be getting $300 per share right now for their investments in an IPO, there would be a lot more rumblings about going public.