Facebook IPO hype could bite investors
Though there's lots of buzz about the new stock offering, traders and consumers should temper their enthusiasm for the social-networking giant.
Social-media giant Facebook filed for its initial public offering Wednesday. The company's filing documents say it generated $3.7 billion in revenue in 2011 with $1 billion in net income, a 27% net profit margin. Revenue was up 88% in 2011 after a 154% gain in 2010. The offering shows that CEO Mark Zuckerberg owns 28% of the company and earned $1.48 million in salary and bonus in 2011.
But there are still a lot of unknowns: how the user experience will change, how profitable Facebook will continue to be and, of course, how Zuckerberg and company will spend the mountains of money they rake in from a stock sale.
But one thing is for sure: This could be the most-hyped IPO in recent memory. And that enthusiasm could be bad for investors who try to get a piece of Facebook.
Post continues below.
Facebook has grown from an online diversion to a vital part of modern communications since its birth in Zuckerberg's dorm room nearly eight years ago. According to media reports, the market value of the company will range between $75 billion and $100 billion after its IPO. The $10 billion raised from public investors will theoretically go toward increasing the reach and scope of Facebook's services, with hints that some type of journalistic foray is on the way, judging by the purchase of the domains that are variations on the phrase "Facebook newsroom."
Consumers and Facebook junkies know the appeal already. You see pictures of the grandkids or old college roommates. You get news from your favorite sources. You get special deals, play games and more.
But investors need to be wary here. The question isn't whether Facebook is fun but whether it will always be profitable.
In September, eMarketer estimated Facebook's 2011 revenue at $4.27 billion, more than double that of 2010. But such a figure is irrelevant without details on costs. After all, General Motors (GM) managed to rake in tens of billions in revenue but still go bankrupt; profits are what really matter. CNBC reported last week that "the company's expected to earn about $3.8 billion in 2011 full-year revenue and roughly $1.5 billion in operating profits." But that's just speculation. ZDNet questioned those numbers but still figures Facebook is profitable.
A long way of saying that all this hype about Facebook's IPO comes amid great uncertainty over whether it can continue to to turn a significant profit.
What's even more disconcerting for investors is that Facebook is the hottest ticket in town, talked up by some folks who don't understand the nature of IPOs or the stock market, and that has pushed pricing sky-high. Mark Hulbert estimates that Facebook's stock offering will be priced nearly 40 times above the average large-scale IPO of the last 40 years.
That's saying something, considering that despite Facebook's mammoth $5 billion price tag it won't even crack the top 10 largest IPOs in history.
Even more disturbing are echoes of the tech bubble from 10 years ago. Social media companies like LinkedIn (LNKD), Renren (RENN) and Pandora (P) rushed to the IPO scene in the past year to capitalize on the buzz created by a Facebook offering and general enthusiasm for all things social. Many flamed out spectacularly after the facts of their rather disappointing operations came to light. But now these companies are rallying on little news, simply by virtue of being in the same sector as Facebook.
So to summarize, we have a company that has questionable profitability but a nosebleed valuation -- and the optimism over its IPO has lifted the entire sector without discretion.
Sounds an awful lot like the dot-com bubble, if you ask me.
Until there is hard evidence that Facebook will continue to be as good at making money as it is at killing worker productivity at the office, Wall Street would be wise to temper its enthusiasm.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.
MORE ON MSN MONEY
VIDEO ON MSN MONEY
Classic pump and dump comming. Go ahead throw your money away.
Facebook will be FADEBOOK after the lock -up period.
What a scam, and they still let them get away with it.
Don't buy into this crap stock! Invest in something that actually has worth and protect your money. I am sure FB will be around in one form or another for awhile but it's also the one of the worst places you could put your money. They build nothing, they provide nothing useful and there will be another latest and greatest to come along soon!
If you do buy, get in and get out soon!
Everything about Facebook indicates the $5M figure, 'way down from the much-ballyhooed $10M of just days ago - is an intelligent understanding that the issue ain't all that. Even at $5M the chances are that this IPO will prove to be an investor disaster of record proportions.
I'd love to get in on the institutional ground floor, and back out within 48 hours. Retail investors are going to be marks; faced by Suckerburg's IPO.
Facebook stock will go to select individuals when it is first offered and after that it's stock will skyrocket for those who are stupid enough to try to buy it, After they have sunk their money in it it will then drop like a rock, The only people who will make any money on it will be Zuckerberg and Co and those elite that get the early IPO, after that you may as well just throw your money away.
Just another bubble that will burst
Copyright © 2013 Microsoft. All rights reserved.
Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.
Fundamental company data and historical chart data provided by Thomson Reuters (click for restrictions). Real-time quotes provided by BATS Exchange. Real-time index quotes and delayed quotes supplied by Interactive Data Real-Time Services. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by SIX Financial Information.