The largest initial public offering (IPO) in history for an Internet company will occur this Friday when Facebook will offer approximately 330 million shares at an estimated $28-$35 per share. This represents about 16% of the company. The numbers suggest that Facebook is valuing itself at nearly $100 billion and will make chief executive officer, Mark Zuckerburg the richest twenty-seven year-old in the world!
Facebook is the largest, most popular social website with an estimated 900 million members. This IPO is generating a lot of buzz around the world and the question on everybody’s mind is, “Would this be a good investment?” Lots of folks recall the Apple story of when Steve Jobs returned to Apple as it faced financial ruin. If you’d invested $10,000 at that time in 1996, your investment would be worth over $1 million today! Or how about the Google IPO where a $10,000 investment on the first day of trading would be worth $60,000 a short eight years later amounting to a 25% annualized return.
Google is perhaps Facebook’s number one competitor for online ad sales. So how do the numbers for the two companies compare? Google is currently selling for about five times revenue while Facebook will sell for nearly 25 times revenue. The average stock in the S&P 500 sells for about 1.2 times revenue. And much of Facebook’s revenue came last year when they ramped up ad sales and drove up revenue 88%. This would suggest that an investment in Facebook is betting on very high future revenue growth. Eventually stock price reflects the value of current and future revenue streams and at twenty-five times revenue, Facebook has a big job ahead.
If you’re determined to buy IPO shares in Facebook, you’re likely to be disappointed. Here’s typically how IPO shares are delivered to the public. Facebook will set the price on May 17th after the market closes. The three lead underwriters of the stock, JP Morgan, Goldman Sachs and Chase, along with approximately 30 other smaller underwriters will have shares allocated to them which they’ll divvy up among their best clients, mostly institutional investors for pension funds and endowments as well as hedge funds and their wealthiest clients. It’s the age-old story of Wall Street insiders, well, protecting Wall Street insiders. Even the traditional ‘consumer friendly’ discount brokers such as Fidelity and Schwab have indicated they will restrict the offer of shares to their elite customers. What this means is that you, the average Joe, are unlikely to be able to buy any shares until the market opens the following morning. You’ll be competing with the masses as well as the institutional investors and we’ll likely see millions of shares traded and lots of volatility.
While it might be fun to own a few shares of one of America’s iconic success stories, I’d recommend keeping your serious money in great American companies with proven long-term track records. While there hangs a Design and Development myth that buying IPO shares is a license to make a killing, you need only to look at recent IPO’s for Groupon and Pandora with their more than 40% declines to realize there are no sure deals. Facebook is a great company but that doesn’t mean it’s necessarily a great investment.