Facebook IPO: Why investors should wait

If you look past the hype, you'll see that some serious red flags merit scrutiny.

By MSN Money Partner May 10, 2012 4:40PM

By Therese Poletti for MarketWatch


Most investors realize that unless they work for a big mutual fund or institution, they won’t likely be able to buy shares of Facebook when it makes its debut late next week. MarketWatch.com


Facebook’s upcoming IPO, which is expected to value the company at around $95 billion, is the biggest Internet IPO since Google (GOOG) went public in 2004. There even will be shares allotted to retail investors, with perhaps 20% to 25% of the offering going to retail or online brokerage firms catering to average investors and day traders.


Still, the question for most investors will be whether they should buy Facebook shares after the first-day pop. The big money will have been made by top executives, such as founder and Chief Executive Mark Zuckerberg, its venture capitalists and other bigwig investors. Joe Day Trader and his brethren will have to look at the stock --  after it prices and begins actual trading -- and decide for themselves.


The anticipated frenzy over one of the largest tech IPOs ever is probably going to be contagious. Already, the company’s road show has been covered ad infinitum by the media --  a road show that didn’t appear to offer much new information beyond the prospectus.


Leading up to the road show, which started Monday, some of the biggest speculation was about whether Zuckerberg would show up, and if he would wear a suit instead of his much remarked-upon hoodie. (He did show up, at least in New York, but he did not wear a suit.)


Facebook appeared to listen to the gripes of investors in New York, who were irked that the company wasted precious road-show time showing its slick 30-minute video --  which had already been seen by many online. The company reportedly did not show the video in Boston. Still, it’s going to be easy for investors to get swept up in the hype. After all, nearly 1 billion people are registered monthly users of the social network. Most people know what Facebook is or they use it.


I’m certainly not a financial adviser, but average investors might do well to avoid the first-day madness and instead wait and watch how the stock trades and whether it looks like it is going to be able to maintain its hefty valuation. Even the Oracle of Omaha, Warren Buffett, said he won’t be investing in Facebook. But it’s worth noting that he is also incredibly averse to investing in IPOs.


On the bullish side, though, one Wall Street analyst, Arvind Bhatia at Sterne Agee, one of the early birds to initiate coverage, started covering Facebook on Monday with a buy rating, and a price target of $45.


"Just like Google did less than a decade ago, we believe Facebook is disrupting the worldwide advertising market," Bhatia wrote in his report.


Post continues below.



The warning signs

Here are some red flags investors should pay attention to before making the big leap:


1) Zuckerberg, as we have noted before, will continue to rule Facebook with an iron grip. After the IPO, he will control approximately 57.3% of the voting power of Facebook’s outstanding capital stock. It’s a Zuckerberg dictatorship, and any bets are bets on the 27-year-old CEO.


2) Facebook’s revenue growth rate started to slow in the first quarter. While the company’s revenue of $1 billion in the first quarter is still growing, its growth rate slightly decelerated to 45%, down from growth of 55% in the previous quarter.


3) Inconsistent revenue patterns, or lumpiness, as the Street likes to say. Morningstar analyst Rick Summer predicted in a February report that "despite our bullishness, we expect a lot of volatility in Facebook’s revenue growth rates, which may translate into stock price volatility," Summer wrote. "Even looking at historical quarterly revenue growth, the lack of consistency is notable."


4) Facebook is not as pervasive yet on mobile devices, especially smart phones, as it is on PCs. The company’s $1 billion acquisition of the photo-sharing app company, Instagram, was an indication that mobile is a bit of an Achilles heel. In March, the company had 488 million monthly users of its mobile products, according to its most recent regulatory filing.


Bhatia at Sterne Agee believes that mobile will be a "significant long-term growth opportunity for Facebook, but with some initial challenges," he wrote. "For example, it is not yet clear if most of the mobile advertising growth will be incremental or will cannibalize online advertising."


5) As younger startup companies develop competitive threats to Facebook’s dominance in social networking, the company may use its cash and stock to acquire them. Analysts have speculated that based on its recent deal with Instagram, it is not inconceivable that Facebook, which doesn’t yet have a long track record doing acquisitions, could also acquire other fast-growing startups, such as Pinterest or Tumblr.


Those are just a few things to be watching for as Facebook goes public. Perhaps a theme song for the more bearish minded investor during this closely watched IPO could be Public Enemy’s hit, "Don’t Believe the Hype."

May 10, 2012 5:56PM
Nobody should invest in a company that sells private information to the highest bidder.

That is how Facebook got its money before now: They sell your IP address and whatever else you put on FB to ad agencies, front groups for spam harvesters (ie: con artists), or anybody willing to buy.

Even if I could get the stock, I wouldn't touch it out of moral obligations.

May 10, 2012 11:27PM

I guess I'm an oddity.  I have no Facebook account.  Don't ever plan on having a Facebook account, and don't want a Facebook account.   For some reason, I just have no need to share my life with others on line. 


Other than posts on here, or on a couple of other political sites, this pretty much makes up the bulk of public exposure I wish to subject myself to online.


While I like my privacy,  some apparently can't reveal enough of themselves to others of whom they have no idea who they might be.  That can be a pretty dangerous thing.


 I don't tweet, post videos on youtube, or  skype.  10 years ago, people would have been asking "what the hell is a tweet? (or a youtube or skype)   So, I guess I'll stay happy just being an old behind-the-times-geezer.   Now, where did I put that pager??

May 10, 2012 7:59PM
I trade for a living.. and I will not go near this boondoggle...
the article states $1 billion in revenue...
what I want to know is, what is the profit margin...
I mean losses.
May 10, 2012 11:46PM
All I gotta say is facebooks ipo is coming out when the site is in decline. the yougster no longer think of it as hip, it will be only matter of time before it dies out completely like MYSPACE.
May 11, 2012 12:19AM

Facebook is way overvalued.  How to they get 95 BILLION from a social networking site?  What do they do that is worth anywhere near that much?


I never had a FB page, nor do i ever want one.  I don't have money to invest, but ill be watching to see if i should have invested.


Zuckerberg would be smart to cash out while he can get maximum dollars for himself, Facebok can go only one way - down.  It has capped out already.


May 10, 2012 11:14PM
Buy now and get hosed or wait and get hosed. It's a golden shower either way.
May 11, 2012 2:04AM
I won't buy. Reminds me too much of the AOL Time Warner feeling of wanting and wanting and then the chance comes and you strike like a fish for a lure.

They fell in love with the hype and too much time to become too important to themselves and the interest is waning before the open.

This is a Zuckerberg company, All he wants is for someone to like him and thats not ggoing to happen. With all his bad karma with his past partners I would not buy into or even be part of this over-hyped event.

I do not have a FB account.

May 10, 2012 11:41PM
I canceled my FB account.  Security issues.  My name and contacts are now on the internet and it came from FB. I am trying to delete the captured information off a simple google search
May 11, 2012 7:11AM
Still, the question for most investors will be whether they should buy Facebook shares after the first-day pop.


No, my big question remains, who is buying this stock to begin with? If it's not Buffett, and it's not me, and it's not you, and it's not anyone commenting on  this thread, then who? A bunch of Wall Street traders, hedge funds, and remarketers perhaps?


I just better not find out it's the manager of my retirement fund or I'm going to be really I-POed.

May 11, 2012 1:30AM

Cisco announced this week a drop in sales due to worries from Europe and greater overall economic sluggishness. The tech sector, like the rest of the market run up, could be just about out of gas.


FB has it's own problems, detailed above, and others, making it difficult to value.


If these problems are temporary, chances to buy will still be there later. If not the group mentality to rush in will only make the initial holders and Zuckerberg (Want to end up a Suckerberg)? richer.


Easy call, here. Put it on a watch list and wait to see what happens.   



May 11, 2012 1:17AM
You CAN NOT delete your facebook account. Facebook holds the rights to each account and all the contents of each account. It is not your information, all the information is owned under protected copyrights by facebook.
May 11, 2012 10:24AM
I wonder... If the Facebook owners went on the TV series 'Sharks' and asked for 45 billion dollars for a 49% share in the company, how many of the Investors would say "I'm Out" before steam even began rising off that pile? Bet all of 'em!
May 11, 2012 2:11AM

There is quit a bit of information to consider here for the "Smart" investor. HOWEVER, what people may see here with FB is a real chance to make some quick income, maybe even at someone elses loss. To sit back and think, who's money did I just profit from and did that person profit too and so on, lends one to think, what substance is going to maintain this ongoing profit for down line investors. Some smart people or maybe dumb investors,like myself, may decide to do the right thing and not seek a quick money making scheme, but hold FB up to be the real money producer it can be and serve the public wisely and well. My point is, don't go trying to make your money quickly hopeing someone else will end up holding the bag of "nothing", look after your "brothers' best interest by investing in smart and responsable companies. FB may be one, I just hope there future business plan is productive and deserving of the public through offerings of good public service before quick driven profit schemes. I don't think FB is a scheme by any standard, I may waite to see if the stock is valued well and see if it's future plan is worth investing in......and thats only if I can come up with an additional 5K for the 100 shares, if I'm lucky. I'm a docotor and it's still difficult for me to come up with 5K to invest in 100 shares or so, I do have 4 girls and a wife to support, O.K. my wife supports me,lol. My point is I feel for the general public who could truly benefit from a FB IPO, who may not have even $100 to spend on what they may consider an accessory after paying rent, car payment, food, utilities, etc. My prayers are for those who are the "Have Nots" that they find a way through Gods Grace in Heaven, here on Earth, to find a way to make an absolute "killing",lots of money, from a miracle or His divine intervention. Anyway, I'll stop preaching. Seriously, Good Luck to anyone who has the means to invest in FB and even more Good Luck to those who don't, so that you may. God Bless.  

May 13, 2012 2:19PM
Dubious investment , expect it will trade below offering price in 12 months.
May 10, 2012 6:31PM

This article is ****, whoever wrote will try to buy on the 1st day, I guarantee it. I will try to get some shares, I think this will take off big time. But with my luck I wont be able to get any.

May 10, 2012 10:49PM
I am buying facebook stock. Short.....real short. This stock will soar for about two days and then drop because people like me will make a few bucks and want to keep it. We will take our profits and wait for it to drop and buy it again when the rest of you get scared and run away. I would warn not to drink too much of the kool aid, but go with the mobs on this stock. This one will go up and down not over days but hours and you could make some money or loose your butt.
May 11, 2012 2:23AM
Not sure what to make of the lawsuit against facebook by Leader technologies that Leader has already won.  The judgment was set aside or something to that effect but the jury found Facebook guilty of stealing the code for the engine that runs facebook.  If Leaders appeal is successful it will be a disaster for facebook that could potentially shut them down.  Why was there no mention of any of this in facebook's S-1 filing and why aren't any of these articles mentioning any of this? 
May 11, 2012 2:31AM
No one understands Facebook. It is not sharing your life with strangers, it is reconnecting with lost friends and family, and sharing with people already in your life, like current friends.
May 10, 2012 9:43PM

Open the heart, look at my name, let us help you find your lover, this is an old people communicate with each other.

Then, look my name if you are over 40 years old, it's a hot place for aged people...

The four laughed. "That's his style, sure enough," Jim agreed.

"What does he want to do West?" asked Hench.

"_He_ doesn't know. Write a book, I believe, or something of that sort. But he _isn't_ an ****. He has a lot of good stuff in him, only it will never get a chance, fixed the way he is now."

May 11, 2012 2:32AM
No one understands Facebook. It is not sharing your life with strangers, it is reconnecting with lost friends and family, and sharing with people already in your life, like current friends.
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