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:
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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?
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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?
- 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:
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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.
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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.
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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?
- 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.
