‘Like’ the Facebook IPO?

You’ll soon have the opportunity to expand your relationship with Mark Zuckerberg — from friend to investment partner. Facebook shares will be available to Main Street in the upcoming social media giant’s initial public offering. You likely won’t have access to the highly coveted IPO shares, but FB shares will eventually trade in the public market. Should they be part of your portfolio?

After reading piles of stories on the upcoming IPO, I thought it helpful to share some insights on the process of initial public offerings and factors you might consider in making investment decisions. And remember, whether it be FB or any other investment, a good investment is one that fits your overall investment strategy, which in turn fits your financial plan. It’s not the other way around.
After reading piles of stories on the upcoming IPO, I thought it helpful to share some insights on the process of initial public offerings, and factors you might consider in making investment decisions.

IPO’s are a sure thing, right? Google’s share price leapt 7-fold since it’s IPO in 2004. Outstanding! But we tend to remember the winners and forget the losers. Hear of Boston Chicken’s IPO in ’93 (now called Boston Market)? Most people were surprised the day it went public. Shares were priced at $20, market opened at $40, and closed just shy of $50.

I couldn’t buy shares at the IPO. There were a limited number (about 11% of the total outstanding) offered by brokerage firms (“underwriters”) – akin to getting tickets to the Presidential Ball. It was risky to chase a stock that ‘experts’ had mispriced. The company (barely profitable after 3 years of losses) missed nearly $38M in cash at the IPO and brokerage firms blew another $2M in commissions. And we expected downward pricing pressure as more shares came to market in 3-6 months. (IPO’s generally have a lock-out or “cooling off period” until privately held shares may be sold).

The company filed for bankruptcy 5 years later.

Four criteria for a good stock include:

• Hugely competitive advantage
• Superb management
• Solid growth plans
• Attractively priced relative to peers (industry)

Some things to consider from reports written on the FB offering documents (I haven’t read the 213 page S-1 filing):

• FB is a significant force in social media– Can they maintain their ubiquity in a creative and changing world? AOL and Yahoo didn’t.
• Will new players be needed to replace key folks who become multi-millionaires and decide time to move on?
• Assuming a $100B valuation, P/E ratio estimates range 77 – 100. (Google is about 20x with $100B in cash).
• Other than cashing out some venture capitalists, will it lead to exploitation of users with more ads and sharing of user info?
• Investors may have to wait until April or May when FB is publicly traded

This isn’t a recommendation to buy (or avoid) the shares. Perhaps it is better to have realistic expectations and wait for the hype to settle. Meanwhile, I’m off to make some whacky Super Bowl prop bets – Madonna wears fishnets and the Gatorade shower isn’t colored red.

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