2011 was a dismal year for IPOs, but 2012 definitely looks set to make up for lost time. Of course, the most anticipated and talked about is the Facebook IPO, reported to make its debut on May 18, 2012.
Is Investing in Facebook a Good Idea?
The Answer is Yes and No, Both
Yes, due to the fact that an extensive study of a wide range of IPOs over an extended period of time performed by professor Ramadorai from the Said School of Business at the University of Oxford reports that company shares tend to rise 6.2% during the six month period immediately following the IPO, as compared to 4% for comparable companies. Then, these IPOs will most likely under perform their peers in the succeeding two years. Perfect strategy for the short term and opportunistic investor looking to lock in a quick profit?
Online Advertising Spending
One more reason to say “Yes” is, Facebook’s source of revenue is through Ads, and from the research I found (take a look at the left image), that only miniscule amount is being spend on Facebook compared to other rivals. In an upcoming years, this is surely going to increase and so Facebook’s earnings will increase, also remember Zuckerberg’s words “Facebook is a fashion and fashion never ends”
No, since Facebook already seems to be richly priced from a value investing standpoint, using the Graham and Dodd evaluation method. Furthermore, executives of companies preparing to undertake an IPO only do so when they believe the share price has reached a peak. It is also widely rumored that the smart money, such as Peter Thiel, Goldman Sachs, Microsoft, or Mark Pincus of Zynga fame, has already made its money from Facebook. Indeed, with Facebook belatedly carrying a $80 to $90 Billion valuation, it is hard to imagine how much upward potential the stock price can still have.
The Facebook IPO news have been quite tantalizing of late with the road show now in full swing and Mark Zuckerberg still making appearances in his customary hoodie and sneakers. Uncharacteriscally, the IPO online presentation eschews cold hard numbers, and instead delivers a sentimental journey into the vision of Facebook connecting the world.
337,415,352 shares are due to be offered in the $28 to $35 price range, with possibly 20% to 25% reserved for TD Ameritrade and E-Trade, which supposedly will represent the small retail investor.
So, is investing in Facebook a good idea? As one savvy investor has succinctly asked: “Will 1 Billion investors “like” Facebook?”