2/2/2012 4:30 PM ET|
How to buy Facebook -- if you must
Despite the risks, a lot of investors will want to buy in. Consider this guidance on finding the right time to purchase shares.
I can think of several good reasons not to buy scratch-off lottery tickets, but states will nonetheless sell more than $30 billion worth of them this year. So it is with Facebook's hotly anticipated initial public offering. The company filed papers with regulators on Wednesday and is expected to start selling shares in the spring.
History says don't buy in. Most IPOs lose money, studies show, which makes sense, because they represent a highly informed class of investors deciding to sell. And most of last year's dot-com IPOs -- including LinkedIn (LNKD, news), Groupon (GRPN, news) and Zinga (ZNGA, news) -- sit solidly below their first-day opening prices.
Valuation says stay away, too. Facebook brought in $3.7 billion in revenue last year, and its post-IPO stock market value is estimated at $75 billion to $100 billion. That suggests it could trade at 20 to 27 times revenues, making it perhaps the most expensive stock in America. The median price-to-revenue ratio for U.S. companies is about 1.4. Wildly popular growth stocks like Red Hat (RHT, news) and Intuitive Surgical (ISRG, news) trade with ratios of 8 to 10.
But again, none of this matters to the many investors who are determined to buy in. And who knows? They might make good money. Google (GOOG, news), after all, defied the odds. Its shares began climbing immediately after its 2004 IPO. They've now multiplied five times in value. And besides, Facebook itself has an interest in seeing its stock price rise after the offering, assuming it will want to conduct a follow-on offering later.
So forget about the "why" or "why not" of Facebook's IPO. Here's the "how" for investors who won't get in on shares at the subscription price and will have to buy in regular trading -- that is, most of them.
Don't buy at the open. The aforementioned IPOs closed lower than they opened on their first day, with the exception of Google, which closed only fractionally higher and which at one point during its first day traded 4% below its opening price. So wait for the open and put in a limit order that specifies a maximum price of 5% or so below the open. If it doesn't get executed, you can always change it to a market order (for immediate execution) shortly before the close.
Don't pay attention to elaborate Wall Street valuation analysis, especially if it involves the term "network effect." Valuation is deeply important for long-term stock performance, but the way to tell which stocks are cheap is to compare factors that are mostly known today. Apple (AAPL, news), Google, Intel (INTC, news), Microsoft (MSFT, news) and Cisco Systems (CSCO, news)are attractively priced, based on their current stock market values, earnings, cash flow and cash on hand, and perhaps this year's growth projections. Projections for their income in 2018 don't matter, because those amount to guessing. Same goes for Facebook.
The "network effect" refers to goods and services that become more valuable as more people use them. The key here is that they become more valuable to their users, but not necessarily to their investors. Whether investors make money depends on how much they paid to begin with. The Buffett effect, in other words, trumps the network effect.
Do bet small, and take profits sooner rather than later. At Facebook's price, investors probably shouldn't fall in love with their shares. Consider that Google's post-IPO rise started from a base value of less than $25 billion in 2004. Facebook, again, will start from a value of $75 billion to $100 billion. That means that for investors to double their money in five years, Facebook would have to become about as valuable as Google is today. It could happen, but for now, Facebook brings in about one-tenth the profits of Google.
And there's a big difference between having Google-like potential and becoming Google.
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They [IPO’s] represent a highly informed class of investors deciding to sell.
Yep, there is only one group that is definitely going to get rich from this IPO; the insiders who already own shares. None of them put up even a fraction of the money or took a fraction of the risk that they are asking new investors to do now. Call me skeptical, I can’t see anything in Facebook’s future business plan or model that even requires a cash infusion. So, is this really to generate cash for smart expansion and profit growth or just a cash-out opportunity at the top for Facebook insiders? Maybe when we see who buys their shares we’ll have a better idea of what a great investment it might be. I’m pretty sure Buffett won’t be one of them. I just hope it’s not the guy managing my company’s retirement fund.
Its all a gamble. Economic espionage runs amuck in this market era.
The insiders and powers to be have convinced us to undermine ourselves through propaganda and volatile shock therapy that has us doubting that there is any money to be made by the common folks that want to invest in THEIR financial future.
Let me remind you that the most successful investor in the world has 3 famous quotes that he lives by and that are soon forgotten by the market zombies that we are:
1:) Buy when everyone is selling.....Price low
2:) Sell if you must when everyone is buying.... Price high
3:) Buy and never sell it or hold.....Berkshire Hathaway has a very low portfolio turnover.
He also said he would not buy tech because he does not understand it.
My own add ins from other influences:
1:) Buy the highest quality stocks you can afford
2:) Trade from experience not emotion
3:) Limit Risk to only what you can afford to lose
Most investors or common retirement traders like me understand this and many more principles.
I personally will wait cash in hand looking for Market valuation, Trader interest and Market direction before pulling the trigger. Portugal may create a 10-20% pullback like Greece and Spain is waiting for its turn. Historically company profitability has been trumped by world markets which makes any trade a difficult decision. Good luck and Bless you all.
Funny how these guys sit and try and discourage you from buying tech companies on an IPO. Yup, listen to them and stay away. Just like all of the hedge fund managers and everyone else who will buy these things up, and bank millions of dollars. And the same reasons he gives people to not buy in are the same reasons they buy them by the millions? And the more they can tell everyday investors to stay away, the more shares for THEM to buy up and make BILLIONS of dollars.
I will probably dabble a bit of risk money into facebook and buy a thousand dollars' worth, but not a bunch until I see what happens. I bought Zynga at $9.50 and now, $12.39. I thought that one came out at $10.00/share, which completely contradicts this analysts comments of "sit solidly below their opening price." The key is, I don't look for something to pop 100% the first day and sell it the next. I look for long term outlook. I am not a trader, but investor. I look at the missed opportunities in the past, and feel that FaceBook has a strong chance of being a long term payoff, far more than any other company in the last 6-12 months, or upcoming.
I bought Zynga towards the end of the day of IPO, yes.
In the era we are in, it seems fundamentals don't always apply and can be thrown out the window at a moment's notice, as what a companies stock does and what it SHOULD do sometimes don't fall in line.
Bank of America was under $5.00 not too long ago with analysts telling you to dump it because of all of the problems they have with their litigation, their mortgage fiasco, etc.. "Dump BOA" was the message being touted right and left. They are in trouble. They are going to lose so much to account for the liability.
Hmm. Today, Bank of America closes at $7.84. That is, what? 60% jump in price? I would never have guesed that.
Netflix. Makes dumb moves. Price tanks from $300+ down to $60 ish? Now, it is quietly come back well over $100, but gee.. they didn't make any changes to their models they made last year when people were calling for the end of Netflix. Analysts said their changes to their plans would cost them. But their user base didn't diminsh THAT much. Another stock I wouldn't have expected to see that happen to so quickly. But, it was also very oversold and some people probably started bottom feeding.
Zynga? I see the relationship with Facebook probably more of an asset than anything the company has. Anyone can write a dumb game for a browser. Angry birds, anyone? The "productivity loss" by just Angry Birds has been estimated well into BILLIONS of dollars. Who is to stay Zynga won't write the next "Angry Birds." Who knows.. Maybe Facebook will see Zynga as such an integral part of them (12% of Facebook revenue) that they will just buy them out and offer a purchase price of 30% over the price of the day, then we can sell.
Analysts fundamentals on what they "Think" a stock should do, for internet companies that they have little long-term experience with, are nothing more than a GUESSING game they make, based on 100 year old lessons from NON internet companies. Sorry, they don't always pan out, and even theri predictions on traditional companies, don't pan out either.
We'll see. Zynga may become the next penny stock that all of these phonies want you to buy. Zynga may be the next $300 stock to join the elite crowd. I don't think anyone knows, but for $9.50/share, it was a cheap buy in.
there will be a lot of unhappy people that first buy in to facebook, within a year it will loose more than half it's value.
Sell short at the open. Easy money.
While the article does talk about the other social IPOs this year, it's worth noting that some of those have come back to the IPO price.
In facebooks case, I think you will have to have thick skin to go short at the open. I don't know how long the pop will last, but my feeling is it will be multi-month on momentum.
You may be able to short once it breaks, but even that is a limited trade. Eventually it will flatten in a sideways range for years.
I will probably dabble a bit of risk money into facebook and buy a thousand dollars' worth, but not a bunch until I see what happens. I bought Zynga at $9.50 and now, $12.39.
Zynga is getting a pop from Facebook revealing they get 12% of their revenue from Zynga. But it's still overpriced (and that shouldn't matter, the outlook for Zynga is the same regardless of the Facebook IPO)
This also supposes you bought at the end of the IPO day and not somewhere at the open.
I look for long term outlook. I am not a trader, but investor. I look at the missed opportunities in the past, and feel that FaceBook has a strong chance of being a long term payoff, far more than any other company in the last 6-12 months, or upcoming.
What's your Zynga theory then? Cause it's way overpriced to the fundamentals.
Now, the one thing that could be huge is if the US lifts the restrictions on online gambling. But I wouldn't own a stock based on the theory of what the US gov *might* or *might not* do.
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