Editor’s note: This article was first published in May 2012, on 17 May, the day before Facebook’s IPO. Its forecasts, such as a jump of more than 35%, are of that moment; the shares in fact closed their first day near the $38 offer price and fell well below it in following months.
Tomorrow (Friday, 18 May 2012) is the long-awaited day when Facebook goes public on the Nasdaq (at 17:00 Spanish time). It has sparked a real frenzy among retail investors and even among people who are not investors but will decide to buy Facebook shares, because even if they know nothing about the stock market, who hasn’t heard of Facebook?
Expert analysts warn that the company’s valuation doesn’t match its revenue, and they have serious doubts. Even so, a tech company with 900 million users can’t, at first, be analysed technically, and only the market will be able to put a value on it once it starts trading. Max Wolff of GreenCrest Capital says it is worrying how much interest Facebook is generating among people willing to invest in the company without even knowing what an IPO is.
Some American fund managers predict that this interest could send the shares up more than 35% tomorrow, but the market will then try to settle on a price, so the danger for retail investors would be buying the shares at too high a price and then seeing expectations go unmet.
Others say that what we saw with LinkedIn won’t be repeated with Facebook, especially after an AP-CNBC poll in which 83% of respondents said they don’t notice Facebook’s advertising. In fact, it is so inconspicuous (so unobtrusive) that most people don’t even realize it is there. This poll is what led General Motors to withdraw its Facebook advertising budget, worth 10 million dollars a year, since it found that advertising on the social network wasn’t paying off.
See also: The world’s 10 most valuable brands: 2013 ranking
Now they warn that if other companies analyse the ratios and returns on their Facebook advertising, other big firms could reach the same conclusion, damaging Facebook’s business model unless the network responds accordingly.
Chris Cordaro of RegentAtlantic says that retail investors who buy shares at a high price this Friday could end up disappointed.
As for the managers’ advice to retail investors, they recommend waiting a few weeks until the market assigns the social network a target price. Of course, once all the noise and volatility of the IPO has passed, we would be looking at a company governed by the same technical rules of the market as any other. So, faced with a big-ticket acquisition like Instagram (1 billion dollars), a tech company that generates no revenue, or an announcement that expected profits had been missed, Facebook’s shares could tumble.
The Spanish newspaper El Mundo reported that Facebook has less revenue than hype around its IPO.
And the main American media have taken GM’s announcement as extremely bad news for the social network because, to repeat, other companies may go down the same road.
Finally, they remind us that, despite the online rivalry, Facebook is nowhere near being Google or Apple. Those companies have a stable, diversified business model with growth prospects, whereas Facebook, for all its users, is a company that, because of its system and model, struggles to make money from the way those 900 million users use the network. On top of that, like Google, it will always be a target for possible lawsuits over privacy policies and the like.
In short, my advice for retail investors is to set a maximum purchase price that they consider fair. That way, if the frenzy takes hold and the price shoots up at the start, the investment in Facebook is called off. Still, even though the high value placed on the social network makes no sense, no one can predict what volatility or return the company will have on its first day, with so many retail investors keen to buy shares. Nor do we know what the big institutional investors will do as the share price moves through the day or the week. Since Facebook’s valuation makes no sense to begin with, we could find something as illogical as Facebook shooting up 150% tomorrow, or losing 5%. That said, the safest and most expected outcome would be a gain of between 15% and 40% at the close (without ruling out other scenarios).
Update (17 May 2012)
Facebook has just set the price of its IPO at 38 dollars a share, at the top of a range of between 34 and 38 dollars. Facebook will sell 421.2 million shares, raising about 16 billion dollars from the offering.
According to Bloomberg, Goldman Sachs plans to halve its stake in Facebook after the social network’s IPO.
Featured image: Jitze Couperus from Los Altos Hills, California, USA, CC BY 2.0, via Wikimedia Commons.
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