Should You "Friend" the Facebook IPO?

Wow! The headlines are buzzing with anticipation as Facebook is widely believed to be readying for an initial public offering. And no surprise—this would be the biggest technology company market debut ever seen, and analysts are weighing in on whether shares will fly or flub.

Before we get to that, I want to say that Facebook is a spectacular company. It’s been around for only about seven years, and it has almost single-handedly revolutionized how people communicate online. At the recent World Economic Forum in Davos, Switzerland, Facebook’s Chief Operating Officer Sheryl Sandberg reported that the company had created more than 450,000 jobs in the U.S. and Europe.

The site boasts more than 800 million active users, and a whopping 50% log in to Facebook every day. If the population of Facebook formed a country, it would come in third-largest in the world—behind only China and India. Clearly, Facebook is a dominant platform and enjoys the lion’s share of the social networking market.

So investors are anxiously awaiting the company’s S-1 filings to get a closer look at the company’s margins, the diversification of its revenue inflows between advertising and other e-commerce lines like Facebook Credits, revenues from international markets and upside potential there—just to name a few.

Investors won’t, however, know the company’s valuation until the deal is actually priced—probably not likely to occur until May, but many analysts are expecting the company to end up valued between $75 billion and $100 billion.

That sort of valuation would mint a whopping 1,000 new millionaires at the company, and Facebook’s IPO could provide a huge boost to Wall Street investment banks sorely in need of a hot stock to excite investors—not to mention that the winning bank will generate an estimated $250 million in fees.

Overall, I think that the IPO is a good thing, since it gets folks excited about stocks and may serve as a rising tide that "lifts all boats" in the tech sector. And the California-based IPO might just help California close its budget gap a bit from the huge pop in capital gains revenue. However, I also believe that the IPO will be met with insider selling that makes owning the stock dangerous for individual investors, which means that for now I recommend you stay on the sidelines.

Keep in mind that even as tech IPOs came back to life last year with hot offerings like online coupon site Groupon Inc. (GRPN), professional social network LinkedIn Corp. (LNKD), Internet radio company Pandora (P), Chinese social network RenRen Inc. (RENN) and social game developer Zynga (ZNGA), investors have increasingly scrutinized the details of these filings, and performance has been volatile. From their first day of trading, Groupon is down 19%, LinkedIn is down 23%, Pandora is down 25%, RenRen is down a whopping 70%, and Zynga—the sole positive—is up only about 11%.

I have little doubt that for the first few days—or even weeks—of trading, Facebook stock is going to be on fire. However, a wave of insider selling will hit as Facebook employees and early investors take the money and head for the beach. It’s estimated that 90% of IPO shares go to institutions and insiders while only 10% are available for individual investors. So the likely scenario is that everyday investors are going to be stuck holding the bag. Stay tuned for further analysis on how the Facebook market debut will affect other companies in the sector!


Louis Navellier

Louis Navellier

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