Facebook – It’s a sure thing, right?

May 2012

If you haven’t been on a very long vacation or living “off the grid” you probably have heard that Facebook.com is expected to become a publicly traded stock very soon. As of this writing, the company expects to finalize their IPO on Friday the 18th of May.

I have been getting calls here and there from clients who are interested in getting into the Facebook IPO. For those lucky enough to be in on the IPO, and most importantly at the IPO price, there is likely some quick money to be made by flipping the stock at a substantially higher price on the initial day of trading. Keep in mind that it is difficult to get shares at the IPO price as the shares are limited and demand for this offering is high. The informal criteria that the underwriters and brokerage firms use to determine who will get an allocation of Facebook shares would resemble the following:
• How regularly you bought IPOs from the underwriter/brokerage in the past
• How many shares you want to purchase
• How large your investment account is and how actively you trade

Investors that have large accounts and trade actively AND are regular buyers of IPOs are going to have the best shot at getting shares at the offering price, which is expected to be $28 to $35 per share or higher. But even those investors may receive only a fraction of the shares they are willing to purchase. The final IPO price will be set by Facebook and the underwriters in the deal, which is led by Morgan Stanley.

Investors that do not receive shares at the IPO price will be left to fight over the shares as they start trading in the public market as early as this Friday. Most market prognosticators are predicting that Facebook shares will jump in price dramatically on their first day of trading.

As a short-term investor, I believe it may be difficult to make a quick buck unless you get shares at the IPO price and have an opportunity to sell them in the first few days of trading while the shares are bid up from high demand. Of course, “flipping the shares” is frowned upon by underwriters and if you do so you will be less likely to receive IPO shares in the future. If you attempt to buy the shares in the open market on the first day of trading, I would suggest that the deck is stacked against you as the buying frenzy will eventually subside. Frequently a hot IPO will see the “high” on that first day of trading and fall off from that high-point over the next couple of weeks or months as investor demand dies down and the focus becomes whether the company is a good long-term investment or not. We may see this same phenomenon with Facebook, but the prices may remain high if investor enthusiasm remains high.

As a long-term investor, you may do okay by purchasing on the first day of trading if you have a long-term (several year) time horizon and believe the company is going to continue to grow its sales and earnings which are ultimately what stock prices are based upon long-term. In the short-run, though, don’t be surprised if your long-term investment is trading at a loss from the opening day prices.

Coincidentally, General Motors just announced today that they are pulling their ads from Facebook.com. Although they will continue to have a free brand page on Facebook, they will no longer pay for advertising. For Facebook, hopefully, this does not become a trend.

Bottom-line, is Facebook.com a sure thing? It seems to me that if you are lucky enough to get it at the IPO price, the answer is a most certain yes. For investors purchasing Facebook in the open market, I advise caution and research. Like any investment, you should understand why you are buying it and how you can make or lose money on it. You shouldn’t buy the stock if your research and understanding of the company goes no further than daily use of the website.


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