Investors who jumped into Facebook when it debuted via its initial public offering (IPO) in May have been burned. The stock opened near $40 per share, hit $45, and then fell by more than 50 percent. Some are now drooling, thinking it’s a bargain at its recent levels. It’s not necessarily so, though.
There are, of course, plenty of reasons to be optimistic. Facebook does have hundreds of millions of users, after all, and many are likely to stick around, as that’s where their friends are. Thus, the company is in a position to generate income from those users, by targeting advertising at them and selling other businesses the opportunity to promote certain stories or events to them.
With its massive size, even modest growth rates can result in big profits. It’s already raking in more than a billion dollars in revenue each quarter. It has billions in cash and little debt.
On the other hand, Facebook’s future is far less predictable than, say, Campbell’s Soup or even General Electric. And hundreds of millions of shares held by insiders are “locked up” for set periods. These shares will be freed up over time, and significant selling could depress the stock further.
Facebook may well prosper over time, but it’s not without risks. (The Motley Fool owns shares of Facebook and our newsletters have recommended it.)
Ask the Fool
Q: Can you explain what the Federal Reserve is and does? – N.B., Strasburg, Va.
A: “The Fed” is the central bank of the U.S. In its own words, it has four main responsibilities: “conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices,” “supervising and regulating banks and other important financial institutions …,” “maintaining the stability of the financial system and containing systemic risk that may arise in financial markets,” and “providing certain financial services to the U.S. government, U.S. financial institutions and foreign official institutions.”
My dumbest investment
When I wanted to buy stock in Apple at $206 per share, my broker talked me into Kodak stock instead. Ouch! I no longer use a broker. – B., online
The Fool responds: Ouch indeed. Apple stock has approached $700 per share recently, so you would have more than tripled your money by now. And Eastman Kodak, sadly, filed for bankruptcy earlier this year.
In this situation, if you were interested in both companies or just not sure, you might have split your money and bought shares of both. (Just be sure that you’re not buying such small amounts that the trading commissions represent more than 2 percent or so of your investment.) Remember that Apple didn’t always look like a winner. (The Motley Fool owns shares of Apple and its newsletters have recommended it.)
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