Why Do We Hate Facebook So Much?

Remember Bernie Madoff? He's the one, of course, who created a gigantic Ponzi scheme that cheated investors out of billions of dollars. Madoff is now in prison for 150 years -- the maximum sentence possible.

According to the highly respected financial blogger Barry Ritholtz, the people involved with the Facebook (Nasdaq: FB  ) IPO are almost as bad as Madoff. Last week, while commenting on the social-networking giant, Ritholtz said, "[This] ain't much below Bernie Madoff greed. This is that sort of stupidity."

At least Madoff went to jail
Ritholtz isn't alone in his criticism. Over the past couple of weeks, the negative sentiment around Facebook seems to be increasing by the hour. We don't like the stock price or the IPO process or the business model or even the hoodie. Not only that, but more and more people seem to be criticizing the entire Facebook experience. It's a waste of time and it violates our privacy, people are saying. Shouldn't we be devoting our resources to curing cancer or building colonies on Mars instead providing more opportunities for people to overshare with each other?

Some of the criticisms are quite fair in my opinion, though some of them also feel somewhat hyperbolic too. Let's sift through all of the criticisms to see which ones are worth holding onto. As investors, we must boldly consider all of the negative arguments in order to see whether there's still a case for investing in the company. Here are just some of the reasons why many of us are starting to hate Facebook:

  1. The IPO debacle. I actually agree that Facebook's IPO process was indefensible on almost every level. In one of the most popular articles we've ever published on Fool.com, my colleague Eric Bleeker wrote that "the process served to enrich the best clients of the big Wall Street banks while individual investors were left out in the cold." Self-dealing of this sort is, of course, what Wall Street does. But didn't we expect more of Facebook -- and particularly Mark Zuckerberg, who is supposedly a guy who doesn't care all that much about money?
  2. The ridiculous valuation. At the IPO price of $38 per share, Facebook sported a P/E of 97, which would have made it considerably more expensive than Apple (Nasdaq: AAPL  ) and Google (Nasdaq: GOOG  ) , which have P/E ratios of approximately 14 and 18, respectively. And Apple and Google are proven businesses with the ability to generate billions of dollars in profits for their shareholders. Facebook's valuation, on the other hand, feels like 1999 all over again. And we all remember how that turned out, right?
  3. The unproven business model. There's been an increasing amount of criticism lately about Facebook's business model. From the very beginning, people had their doubts about the online advertising model. But then we learned just prior to the IPO that Facebook's had some serious challenges in mobile. And then just last weekend, we learned about another "Facebook phone" initiative. To ordinary people (like me) the whole notion of a Facebook phone sounded pretty silly. Facebook was starting to look desperate. Recently one of our top analysts actually wrote a free report urging investors to consider LinkedIn (Nasdaq: LNKD  ) instead of Facebook. You know Facebook is a pariah, when LinkedIn -- with its forward P/E of 80.6 is considered the more prudent choice for investors.

All three of the above concerns are good reasons for being critical of Facebook, and might be enough for some investors to take a pass on its stock. Of course, there have been numerous other criticisms of the company of late. Here are some more:

  1. It has poor corporate governance. According to Motley Fool writer Alyce Lomax, Facebook's "dual-class stock structure makes shareholders second-class citizens." If you're looking for sound corporate governance, then Facebook may not be for you.
  2. It violates the privacy of its users. Facebook doesn't have the best track record when it comes to user privacy. One writer recently dubbed the service "Facebookistan" as a result of its questionable terms of service. If you value privacy, you may not want to buy shares. And you most certainly shouldn't write long posts on the site about how much you can't stand your dirtball boss. That might not turn out well for you.
  3. Its offerings are a waste of time. Critics have been harping on this point for a very long time, but it seems like more and more people have been making this point lately. I'm not a big Facebook user myself, but I also think that most of what we do in our free time is a big waste of time. Is walking around a golf course every Saturday for four hours really a more worthy pursuit than chatting with friends on Facebook?
  4. Zuckerberg is a punk who wears a hoodie. It's funny to me how much people really don't like the hoodie. And hoodie jokes are almost as ubiquitous as using the "Like" joke in an ironic sort of way. If I were tsar, I'd ban those jokes. But I'm not, so feel free to carry on with them.

Obviously, there are many additional reasons why many people don't like Facebook. The above list is just a sampling of the ones I've noticed the most in recent days. I'm not convinced the company is in the same league as Madoff, but it's also clear that its reputation has suffered considerably over the past several weeks.

As investors, though, we need to tune out some of the noise, and focus on whether or not there's long-term value to be captured here. My colleague David Meier and I think there is, and we purchased a small amount of shares last Friday for our 10-Bagger portfolio. With the stock price down a lot since then without any significant news relating to fundamentals of the business, we may consider buying additional shares. If all this hate makes the stock cheaper for opportunistic investors like ourselves, then we can live with that.

Facebook's shares may not be for everyone, however. If you're more comfortable investing in solid, dividend-paying companies, then have a look at our free report entitled, "Secure Your Future With 9 Rock-Solid Dividend Stocks." Facebook, of course, doesn't pay a dividend, which is another reason to hate it. Click here to grab your free dividend report.

John Reeves owns shares of Apple and Google. You can follow him on Twitter @TenBaggers.

The Motley Fool owns shares of Apple. The Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of LinkedIn, Apple, and Google. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (10) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 30, 2012, at 4:11 PM, pondee619 wrote:

    "Is walking around a golf course every Saturday for four hours really a more worthy pursuit than chatting with friends on Facebook"

    YES. A long walk, 4 hours or so, in a park with friends, or strangers who become friends for four hours, chatting face to face with hand gestures, facial expressions and voice inflections, is very much better than sitting in a chair in front of a computer screen tying to whomever.

    " My colleague David Meier and I think there is, and we purchased a small amount of shares last Friday..." How do you envision FB making money enough to justify it's current valuation?

  • Report this Comment On May 30, 2012, at 4:22 PM, makelvin wrote:

    "...Why Do We Hate Facebook So Much?..."

    I don't think most people really hate Facebook and its stocks; I think it has more to do with the fact that the stock price is ridiculously overvalued along with the unproven business model. This is essentially your number 2 and 3 reasons in your article. This made the stock really unattractive to most sane investors.

    But as for your number 1 reason where they have their IPO debacle, it certainly smells like something is criminal going on during the whole IPO process.

    Facebook stock needs to be going down a lot more before it can start to look attractive. People who are greedy now will rightly deserve what they get at the end.

  • Report this Comment On May 30, 2012, at 4:30 PM, makelvin wrote:

    "...With the stock price down a lot since then without any significant news relating to fundamentals of the business, we may consider buying additional shares....'

    If a grocery store decide to sell their milk for $1000/gallon, would you buy it? Not let say, all of a sudden they decided to reduce the price of their milk to $750/gallan, would you then say it is now at a bargain basement price and should be buying it all up?

    You are completely out of your mind to think that people should be buying more share simply because there are no additional news relating to their fundamentals. The share price should continue to go down to where they are truly worth with or without any further negative news about its fundamentals. This is because as you have pointed out in the article, their share prices are ridiculously overvalued to begin with.

  • Report this Comment On May 30, 2012, at 10:28 PM, vv234 wrote:

    I second the forst comment by pondee619. In addition to the face-to-face connection with friends in a park, you also get a very good exercise which is much healthier than sitting in front of a computer "friending" your

    invisible so called "friends". Although this article lists some good points from others, but the author clearly does not really get why many people "hate" FB stock (yet).

  • Report this Comment On May 30, 2012, at 10:46 PM, AintRaight wrote:

    Because it is facebook and if there is a sleazy, underhanded thing going on the internet that you would be opposed to, FB probably has their hand in it.

    Too many potential legal hassles, too much opportunity for the masses to become very irate and turn on FB.

  • Report this Comment On May 30, 2012, at 10:51 PM, TMFBane wrote:

    pondee619, You asked how do you envision FB making enough money to justify the valuation. That's an excellent question that I would love to purse in some detail -- so look for a dedicated article on that in the future.

    My colleague David Meier and I touch on this briefly in a video, "What's Facebook Worth?" which is here:

    http://www.fool.com/investing/general/2012/05/30/whats-faceb...

    We understand the arguments of those that challenge the valuation. But we also feel there is a lot of future value there that has to be considered too. FB has over 900 million users, and really hasn't yet turned up all the dials to monetize that incredible user base.

    Here is something incredible to consider from a fine article I read today, "Facebook is bigger than tumblr, Pinterest, Twitter.com, LinkedIn, MySpace, and Google Plus ... times two. Put all these numbers together and what you get is: One in every five page views on the Internet is a Facebook page. If the Internet is valuable, Facebook is valuable."

    The link to that article is here:

    http://www.theatlantic.com/technology/archive/2012/05/the-ca...

    Valuing FB as it stands right now is certainly a necessary exercise. But it doesn't begin to accurately capture the value of what this growth and engagement might mean in the future. That's why Dave and I took a small position in the company -- we think it's a business with enormous -- but hard to quantify -- growth potential.

    But as I said, I'd like to devote more time to laying out the case, so look for a future article.

    As for golf, i totally get the part about the walk and the conversation. It's the hitting the tiny round ball part that I don't get. Actually, I do get it, and think you have made a fine case for the sport!

    Thanks again, everyone, for your comments.

  • Report this Comment On May 30, 2012, at 11:16 PM, gcp3rd wrote:

    Agreed that despite the IPO debacle if we are investors we have to consider: is there an investment here? But with shares being so pricey based on actual numbers and no clear path yet on how FB will monetize it's incredible user base I can't justify buying in yet. I experimented with Groupon buying a tiny stake and then selling it at about $22 when it was obvious there was no clear support for that price - it closed just over $11 today. So most likely FB has some stock prices declines to go through first - but it ain't going anywhere.

  • Report this Comment On May 30, 2012, at 11:43 PM, SuntanIronMan wrote:

    "Facebook's valuation, on the other hand, feels like 1999 all over again. And we all remember how that turned out, right?"

    This is not 1999 all over again. Nor does it feel like 1999 all over again. People aren't valuing Facebook based of something nebulous like 'eyeballs' or 'clicks' or whatever other nonsense that was used back then. Facebook has earnings. Earnings valued fairly-high, but earnings. That couldn't have been said about a lot of tech bubble-era internet companies.

  • Report this Comment On June 01, 2012, at 10:03 AM, pondee619 wrote:

    Golf is in the interest of good health and good manners. It promotes self-restraint and affords a chance to play the man and act the gentleman.

    -William Howard Taft

    Quoted in Michael HobbsThe Golf Quotation Book (1992).

    Can the same be said for FB?

  • Report this Comment On July 25, 2012, at 10:08 PM, pronorth wrote:

    Why do we love linked in so much with a PE of over 300 it makes FB look like a screaming buy and if FB actually beats it's earnings estimate those who hate may just be be hating themselves. The IPO debacle does not reflect on the fundamentals of the company. That is if anybody trades on fundamentals any more. In any case I hope that the people that ripped of investors in the IPO go to jail. But that is just as likely as bankers trading on fundamentals. This just doesn't happen any more.

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