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.

By MSNMoney partner Feb 1, 2012 11:33AM
Updated Thursday, Feb. 2

By Jeff Reeves

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 editor@investorplace​​.com, 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.





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Feb 1, 2012 12:58PM
Everything about DoucheBook is over hyped.....If you have a life, you wont need it.
Feb 1, 2012 1:19PM
Face Book is over hyped and gloriously over estimated in its potential. This will bring a new round of suckers being duped into the hype..Dop not buy it you do not have a chance.....!!! Boycott it and watch it drop like Groupon and other recents IPO's.

Classic pump and dump comming.  Go ahead throw your money away.

Feb 1, 2012 1:33PM

Facebook will be FADEBOOK after the lock -up period.


What a scam, and they still let them get away with it.

Feb 2, 2012 12:19PM

FB is a fad, like myspace.  new technology will make this obsolete.

Feb 1, 2012 1:13PM
can we bet against this thing the way wall street was betting against us?
Feb 1, 2012 1:18PM
Hype is accurate...once FB goes public, it will lose its appeal to young people...as it is, it's been over-promoted as some kind of magical marketing tool. A public company has to expose its REAL numbers, will be open to REAL analysis, and I believe real data will be a far cry from the hype, particularly when it is inevitably replaced with "the latest thing" not far down the road. Cash in if you can, but dont expect any long term return!!
Feb 2, 2012 12:14PM
Wasn't there a site called Myspace? Hows that working out? 
Feb 2, 2012 12:52PM

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!

Feb 2, 2012 12:56PM
blah blah blah blah blah blah blah..............more dumb news for more dumb facebook users.facebook is for kids,why do people even use it???? it will be unpopular soon. just like myspace was the craze just plain not useful,waist of time
Feb 2, 2012 12:22PM
I told my wife about a year ago that in five years FB would be gone . Maybe i should have said three years . Going public....... big bucks for them, and then fade into the sunset !!
Feb 2, 2012 1:03PM
The only person that will get rich off of this is Zuckerberg.
Feb 1, 2012 1:55PM

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.

Feb 2, 2012 1:16PM
Just a heads up, my FB community is deteriorating rapidly. Out of 194 friends I have about 50 that continue to use the portal sporadically but nothing like it once was.
Feb 2, 2012 1:03PM
And their assets are worth how much?   Oops, my bad.
Feb 2, 2012 1:32PM
I would be very cautious about investing too much in FB.  If you must invest; get in , watch carefully for the first sign of decline and get out with whatever profit you've made.  FB is just another fad that a lot of people are already pulling away from.  Several of us have already stopped using it.  You can chat, share pictures and find a lot of truly "free" games to play with hotmail and Google.  The only ones who are going to make the big money from this are the people who have already made the big money from this.  Beware!
Feb 2, 2012 1:39PM

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


Feb 2, 2012 2:05PM
I'm reminded of the old market adage: 'Buy on the expectation, sell on the news.'  With all the hype, the IPO looks like the news.  The time to get in was in the early days when you could paint graffiti on the walls, or perhaps mop the floors, and be awarded shares.  To hear all the strange stories, it appears that people who never did all that much will become multi-millionaires.  And it's probably the case that if they are smart they will get the money while the gettin' is good.

The pricing of the shares for this IPO will be determined by the usual: Whatever the market (or suckers) will bear!
Feb 2, 2012 1:54PM
They are spreading this misleading info so as to make even more millions for themselves.
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