Facebook's Panic Buy

 | Apr 09, 2012 | 2:11 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

FB

Facebook is drawing many kudos today on the news that it's spending $1 billion to buy the six-employee team at Instagram. Most people -- aside from being impressed at the price paid -- are crediting Facebook with "getting" the importance of this application.

They are right that Facebook deserves respect for seeing how important this little app is and probably will continue to be. The question is, why do this now and spend this much money?

Instagram was seeking to raise a new round of venture capital at a $500 million valuation. Web companies got fired up and started poking around, looking to buy it.

Also likely a factor here is Facebook's coming IPO. The $1 billion price for Instagram is made up of cash and stock -- but we don't know how much cash and how much stock.

Facebook has about $4 billion in cash on hand. It's unlikely the company is going to want to spend a quarter of that on a start-up. Probably most of the deal is in stock -- and that was probably very enticing for Instagram's founders (compared to taking Google's (GOOG) stock, for example).

But the real reason Facebook bellied up to the bar here is that it is very worried about the shift from desktop PCs to mobile. We know that Facebook is losing money every time an average user logs in to Facebook on her mobile app vs. on the desktop version of the website. As this shift intensifies, Facebook's financials will take a hit -- even as the company tries to figure out how to make a lot more money on the desktop.

With this shift as a backdrop, consider that a new wave of mobile app start-ups like Instagram are emerging that focus on mobile devices. Instagram was cleaning Facebook photos' clock. By taking out Instagram now, Facebook is playing some good defense -- retiring a key new competitor.

So it's a great exit for the Instagram founders and backers, and it removes a competitor for Facebook, but what does it mean for Facebook long term? Not much. The company still has to make a lot more money from desktop ads ... and it has to figure out how to make any money at all from the secular shift to mobile.

Columnist Conversations

Deepwater oil drilling company Diamond Offshore (DO) was up $3.63 per share or + 7.4% today as of 11:23 AM. Th...
Lang:
We waited a bit on this one but still banked a nice winner. SOLD AAPL MAY 525 CALL AT 41.65 (in at 12, so 247%...
No slowdown in cyber attacks and using the pullback to add to the KEYW position at Thematic Growth
General Electric dipped down to key nearby support during the early stock sell off. GE filled the high v...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.