… Or at least to wait a good six months before taking any position.
The possible upside to Facebook’s IPO is so obvious that everyone’s neighbor and dog are also lining up to get some of the shares. That alone – the fact that this is the most anticipated IPO in history (likely) – should be enough of a tip-off to warn you about trying to jump in at the beginning.
Here are some of the key areas of caution you should pay heed to with regard to Facebook (FB). It might ultimately not even be a stock you’ll want to own in just 2 years (short-term traders can read elsewhere, as I know you’ll be trying to take advantage of it anyway).
Typical IPO Risks
Alright – there are the problems that relate to most IPOs potentially, but even more so in Facebook’s case. I already went over some of the potential pricing problems with Facebook in yesterday’s post. But let’s cover some additional ones, too.
It’s possible that the easy money has already been made with the pre-IPO owners and that we’re going to witness something of a “pump and dump/slump” – all the more so because it is expected that about 50% of shares are going to be sold by insiders. This might also indicate the company is already fully valued. Thus some watchers are predicting share prices of as low as $18 out six months from now.
A related issue is that the total amount of shares that will be issued for the free-float post-IPO will only amount to a small portion of the total number of shares. There is an effective “lock-down” on shares going out at least six months, and when that period is up, the larger institutional investors might act to unload quite a bit more into the market, diluting the pool and lowering the price yet again. This is another good reason to wait 6 months.
Another issue with IPOs in general is that the innovators responsible for the creative set up and initial growth might decide to leave after it goes public in order to continue with start ups somewhere else. This wouldn’t be Facebook’s fault, but it is something to consider in light of the projected 50% insider sales figure.
There is also the potential danger of manipulation or transfer of control to some of the largest shareholders, like Microsoft. And there is the much talked-about issue of Zuckerberg’s acquisition of Instagram, which purportedly went against objections from the Board of Directors.
Potential Profit Problems
Finally, the real elephant in the room. Although Facebook is set to open at about half of Google’s (GOOG) current market value, it is currently bringing in revenue of only one seventh (1/7) what GOOG does. Right now about 20% of Facebook’s profit is said to come from Zynga (game-maker), but this cozy relationship might suffer if Zynga makes any changes. And Facebook can’t depend on mobile ad earnings, since the mobile ad revenue market has shown itself to be quite disappointing, counter to the hype and expectations.
So where is growth going to come from? A recent CNBC poll has shown that 57% of users never click on Facebook ads, and another 26% hardly ever do. Worse, Facebook just saw its first quarter of sequential negative revenue growth – an issue that shouldn’t be happening this early in the game if the potential for growth is supposedly still so high.
All in all, there are a lot of question marks around this stock. Don’t be fooled by your familiarity with Facebook. The original dot-com bubble was just as seductive back in its day. My suggestion is either to be a trader (if you must) and pay hourly/daily attention, or wait at least a month before jumping in – and after you’ve done more of your own research.-