5 Reasons NOT to Invest in Facebook’s IPO
One reason for exercising caution when buying the stock which immediately comes to mind is the incredible amount of hype the IPO has generated. Furthermore, even though its S1 filing information painted an extremely positive picture for the company, some details that were disclosed make it hard to justify the $100 billion valuation the company may receive when the IPO is priced.
Five Reasons NOT to Invest in Facebook's IPO
ValuationAt $100 billion, the projected valuation for Facebook appears to be on the high side.
RevenueFacebook's revenue, according to the S1 filing, was $4.39 per user, which is a low number considering the per user revenue generated by other competing firms. Google's revenue, for example came to about $38 billion last year, which works out to more than $30 per user, while Yahoo gets $7 to $10 per user. To make things clear, let's use the above example; last year MacDonald's generated more than $27 billion in sales and had income of $5.5 billion. Facebook, generated $3.7 billion, leaving the company with a profit of $1 billion. That works out to revenue seven times higher for MacDonald's returning a profit that was five and a half times larger than Facebook.
Availability of Stock at the IPO PriceUnless you already have an account at an investment bank with a large balance and have been doing business with your broker for some time, your chances of getting the stock at the IPO price are slim to none. Most individual and smaller investors will have to wait for the stock to open on the stock exchange before getting a chance to buy it. This means that a lot of people will be buying the stock at higher levels, putting delayed downward pressure on the stock. Once the buying has subsided, many people who bought the IPO shares at the IPO price may begin taking profits to realize their gains.
No Incentive for Corporate Capital SpendingFacebook's platform does not support corporate capital spending; being already self-contained, the platform does not offer room for developers to make new third party products. This contrasts with other Internet companies that have gone public such as Netscape, for example. Because the web browser made surfing the internet easier, it stimulated a host of corporate capital spending for development of everything from websites to web infrastructure.
You May be Able to Buy Facebook Stock at Lower LevelsBecause of the hype and the media frenzy surrounding the IPO, a good chance exists that the stock will have a huge run up right after the IPO, and subsequently sell off sharply after the initial euphoria wears off. Most tech IPOs in 2011 traded below their IPO price after their initial offerings, before heading higher. If you absolutely have to buy the stock, you might be better off waiting until things subside to get a better price.
Published on Mar 19, 2012By Jay Hawk
Posted in ...Market Commentary