Facebook IPO : Should You Buy?

The Facebook IPO (Initial Public Offering) today generated more buzz than any IPO I can remember.  Of course, the Facebook IPO is the LARGEST tech IPO in history and the 3rd largest IPO in the history of NASDAQ.  At the asking price of $38, the Facebook IPO creates a value for Facebook of over $100 BILLION.

So, should you buy a few shares?    GOOD QUESTION!

Why You Should Buy Shares during Facebook’s IPO

I heard an analogy today on Good Morning America.  If you bought Apple stock on the day of its IPO, that share you bought for $22 would be worth $44,000 today — an amazing increase in share value.  This begs the question: Is Facebook the New Apple (or the new Google, which is where its aspirations appear to be headed).

Facebook employees believe you should buy their IPO stock.  Last night they celebrated with an all-night hack.

The market and initial investors are certainly excited about the Facebook IPO.  The media is in a frenzy because they know many of Facebook’s nearly 1 billion users are concerned about what the Facebook IPO means for user experience on their beloved social network.  So, the media understands news about the Facebook IPO appeals to a much broader audience than almost any other IPO in history.

Why You Shouldn’t Buy Stock in Facebook’s IPO

First, even if you wanted stock today, it’s unlikely you could buy any.  IPOs normally sell most or all of the available stock to major investors and institutional investors (like pension and mutual funds) leaving little to reach smaller investors.  Initial investors bet the stock price will rise sharply after the IPO, allowing them to cash out with a large profit in just a few days.  Personally, I think this is a major flaw in the investment system that allows insiders to make massive profits denied to individual investors.

But, the bigger question is: SHOULD you buy Facebook stock?

The answer to that is unclear.  Reports suggest even Mark Zuckerberg (Facebook’s founder and CEO) was concerned about the stock and pushed off the Facebook IPO as long as possible.  Although, his fears are likely fueled by concerns of how investors might impinge on his efforts to control Facebook.

A bigger concern is the long-term viability of Facebook.  A recent survey reported on Mashable, more than half of Americans think Facebook will go the way of Myspace.  While it may be hard to see how a social media behemoth like Facebook could fade that far, especially with nearly 1 billion users, it’s feasible.  I’m sure no one could have predicted events that eventually befell Myspace.

Advertising ineffectiveness is more likely a stumbling block for the long-term survival of Facebook.  The valuation of Facebook based on the IPO is a 50X multiple of earnings for last year, which is astounding.  This multiple means investors expect astronomical growth in Facebook revenues in the near future — a scenario that looks increasingly unlikely as giant advertisers, like General Motors, stop their Facebook ads, citing the ineffectiveness of the ads.  While the new “LIKES” generated by Facebook ads are seductive, translating these likes into ROI is problematic for many firms.

  So, what do you plan to do about the Facebook IPO?

Please let me know.  Or, go on my Facebook page and answer the question there.