Why the Facebook IPO will hurt the economy

This post will take a turn from previous posts in general on this blog but it is absolutely relevant to business, finance, and economics. While everyone else is chiming in on their opinions of the worlds’ greatest addition in the new century so will I. The Facebook IPO is a great mistake and opportunity wrapped into one.

Facebook is the beginning of a new age post-recession internet bubble. I have a background in finance and I’m still trying to understand the valuation of Facebook. I’ve seen a few numbers on the company but I won’t be certain of the numbers until the company officially goes public. A valuation of $95 billion on revenues of less than $4 billion is very hard to believe. As with any highly anticipated IPO the first few days would cause the stock price to skyrocket and any untrained investor would try to buy the stock because Facebook is popular. Facebook is a “celebrity stock” and doesn’t have the fundamentals of Google. Google was a popular stock but not a celebrity primarily because Google was in a new but proven sector. Google also had diversified streams of income which allowed the company to be more than just a search engine.

Facebooks’ recent acquisition of Instagram raises even more concerns because of the valuation. Instagram had no revenue but a purchase price of $1 billion is strikingly similar to the Facebook craze. My honest opinion is that this is the beginning of another bubble in the market that the world can’t afford at this time or anytime in the future. However, now that Facebook would be subject to the likes and domain of Wall Street we will see if they can survive beyond the “like” of the general public.

With Facebook being a public company with few hard assets and now at the mercy of financial engineers, quants, and analysts (yes, I’m included) we will see their future in a different light. Possibly the market would realize a valuation that high doesn’t coincide with their numbers. This is great for other tech firms who are looking for their big break in the marketplace. Facebook has had a great run and can still be saved if the income streams are diversified and backed by additional hard assets. If not, it’s possible to see Facebook in the same shadows as MySpace.