Beware the Facebook IPO

A flood of shares could hit the market in 3 months.

By Jim J. Jubak May 17, 2012 5:27PM
What a terrible offering.

Facebook (FB) opens for trading Friday in an initial public offering that is beyond full of the normal fundamental uncertainties. That comes with the turf for hot IPOs, in my opinion.

But the structure of the offering just keeps getting worse and worse for investors. If you can get shares at the IPO price, buy them and flip them by all means. But you sure don't want to think this is a long-term investment.

I think the fundamental problems with the Facebook offering should be known to all at this point, especially because General Motors' (GM) decision to pull $10 million in advertising from Facebook just days ago has focused attention on all the questions about Facebook's ability to grow ad revenue.

Here are the important fundamental numbers. At a likely post-IPO market value of about $100 billion, the market is saying that every person with a Facebook page is worth about $100. In 2011, each Facebook user generated about $4 in sales for Facebook. That's a lot of ad revenue to generate just to get to the post-IPO valuation. Facebook's ad revenue actually fell in the first quarter of 2012 from the fourth quarter of 2011.

But what really bothers me about the IPO is that the terms of the deal were still changing this week, and they were changing in favor of pre-IPO investors who want to cash out and against anyone who buys after the IPO and holds on to the stock.

Here's the problem. Facebook updated its S-1 offering document Wednesday. All the headlines have gone to the increase in the size of the offering. Including the option to sell more shares granted to underwriters (what's known as the greenshoe), the offering size went to 484 million shares from 388 million.

But the S-1 also changed the lockup on the offering. Lockup provisions restrict how quickly pre-IPO shareholders can sell their shares after the IPO. The purpose of these restrictions is limit the pressure on the post-IPO price that would come if a lot of pre-IPO investors dumped their shares on the market all at once. The traditional lockup period is 180 days.

But after the changes to the S-1, Facebook has an unusually short lockup period of just 91 days. That would double the free float -- the number of Facebook shares that trade on the market -- from 484 million after Friday's IPO to 1 billion after 91 days.

At the high end of the IPO range, that would amount to $10 billion in Facebook stock that the market might have to absorb.

That's a lot of overhang. Investors, beware.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. 
post. The fund did not own shares of any stock mentioned in this post as of the end of December. For For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
Tags: FB
May 17, 2012 9:52PM
Tell me this, how can FB Stock be worth more than stocks such as Hewlett Packard, Ford Motor Co. etc? Are we that stupid? Really, FB is a here today, gone tomorrow fad!! They build nothing, provide nothing and have no assests! This is why our economy is so unstable and in such a mess, it's called greed!
May 17, 2012 7:11PM
I understand all that, but how is the average investor going to be able to buy it at its IPO stage in order to flip it in the First Place? The 1%ers are already at the front of the line.


May 17, 2012 8:01PM
facebook is   not Apple it really offers very little and wants to charge for what? more advertisements and put your info out to anyone who will pay it? No brainer! Opt out!!!!!!!!!!!!!!!!!!
May 18, 2012 10:14AM
There is one thing that everyone knows but never acknowledged, and i find this so disturbing.

Mark was asked to build a website back in Harvard, which is now Facebook. He just took the concept from his client.

Does anyone understand his character?

He is a thief and he is running to the finish line because Facebook has peeked and he knows this.

There will be a lot of unhappy investors before long.
May 18, 2012 10:28AM

No stock in FB for me. I refuse to support a company whose co-founder renounced their citizenship. (Saverin)

May 17, 2012 9:39PM
I think I am one of the only people not to have a FB account. I closed my account when ads started showing up in my emails from things that were discussed there on FB with my friends. It seems to be intrusive and not really a very productive addition to society.
May 18, 2012 9:34AM
Buy at $38 and sell within the hour.  This stock is dead and will be under $10 in 2 years or less.
May 18, 2012 12:34AM
I closed my account.  There's a reason I lost contact with people.   I for one never looked at any of the ads on facebook.  For this reason, I doubt ads on this site are effective, and more businesses will be yanking their ads.  Really people, stop trying to impress others with your boring lives, and actually go out and accomplish/experience things.
May 17, 2012 7:44PM
Not impressed and wouldn't invest.  Hey that rhymes LOL

May 18, 2012 12:45AM
@missinglinkingv: "Really people, stop trying to impress others with your boring lives, and actually go out and accomplish/experienc​e things."   

I can't believe you're saying that.  Why, if not for Facebook, I would have no idea that my friend whom I last met in 1984 had just finished eating a tuna fish sandwich.
May 18, 2012 12:04PM
Why do I want to see Facebook fail?
May 17, 2012 7:31PM
As usual the little investor will be left holding the bag.  A fool and his money are soon parted.
May 18, 2012 7:25AM
I would like to see an independent survey done on how many products are actually sold to consumers as a result of a company's presence on FB.  Most companies thing it's the latest "thing" to show how up to date they are with social technology and so they can tell customers to visit us on FB etc.  I don't know anyone who has bought a product or service as a result of FB.  That's why I am surprised when Proctor and Gamble let go a bunch of their marketing people because they were focusing their marketing dollars on their FB page.  It just doesn't make sense.  To me FB is nothing more than a social site for people to post pictures, write on each other's wall as to what they did the night before or will be doing over the weekend.  Zuckerberg and those on the inside and of course the brokers will be laughing all the way to the bank but personally, this business model has minimal job creation and I don't feel is sustainable in the long term.  For those of us who remember the DOTCOM era, I could see the value of FB dropping significantly over the next year or so.
May 18, 2012 10:07AM
Article says,
"Here are the important fundamental numbers. At a likely post-IPO market value of about $100 billion, the market is saying that every person with a Facebook page is worth about $100."

Thats funny, because facebook doesnt get any money from me. I dont click on stupid ads, I do play the stupid games.  I only use it to send a message or keep up to date with friends.  Nothing more.
May 17, 2012 8:42PM
I'm waiting for Cramers opinion so i can do the opposite and make out like a bandit.
May 18, 2012 12:45AM
using facebook now is like using catalog pages as toilet paper- the only ones making money are the Zukerberg crowd- they are laughing all the way to the bank----suckers beware
May 18, 2012 11:00AM
Mr. Jubak states, "...each Facebook user generated about $4 in sales for Facebook. "  That's $4 more than I've spent on Facebook ads.  My opinion is, this is perhaps the biggest LEGAL pyramid scheme ever!!  Mark my words people.  You heard it here first.
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