Sunday, January 29, 2012

Facebook IPO - Steer Clear Investors

Well the inevitable day we all knew was going to come sometime seems to be just around the corner. Facebook is finally set to go public. While the exact date the stock will start trading is still yet to be set, rest assured it will be before the start of summer.

Individual investors, big money managers, and day traders are already foaming at the mouth to get their hands on the stock from day one. Excitement has been building for years now. The estimated $10 billion Facebook will raise makes one's mind boggle as how they will spend it. The market valuation of the company on day one is expected to be anywhere from $75 billion to $100 billion. Maybe more.

Here's one thing you should ask yourself before you jump on the Facebook investing bandwagon. Would you rather own $1000 in Google or Facebook? Which is a better company? Which company do you think will be better in 1, 5, 10 years?

As I type, Google has a market value of $188.5 billion. If on day one of trading Facebook ends with a market capital of $125 billion, that means essentially, that the market values Facebook only $63 billion less that Google. Or in percentage terms Facebook would be worth 66% of Google's value.

At this point I'm not convinced that Facebook is worth two-thirds of Google, especially from inception. If you were to double your investment from day one, Facebook may have to reach a market capital of $200-250 billion dollars. That's more that the market value of all of Microsoft.

While I'm sure lots of money is to be made trading Facebook, do not expect your money to triple anytime soon. For that to happen, Facebook's value would have to approach that of Apple and Exxon Mobile.

The simple fact is that Facebook waited probably 2-4 years too long to go public to really make early public investors big money.

Let's turn back to Google. When Google went public back in 2004, it's initial stock price was about $100 per share, that translated into a market cap of about $33 billion. Now that the stock is trading at $580 per share, if you had bought the stock in '04 and held it to today, you would have almost made six times your money. Example, an initial $1000 investment in Google would now be worth almost $6000.

If Facebook starts with a market value of $100 billion and reaches Google's current market value of $188.5 billion, a $1000 investment in Facebook would be worth only about $1880.

Almost doubling your investment in Facebook would be a great conversation piece, but probably not so much if it takes 8 years for it to happen, just as Google has been trading publicly for almost 8 years now.

The laws of large numbers are stacked greatly against Facebook. The biggest market valued company in the world is currently Apple, with a market cap of $417 billon. Exxon Mobil trails in second with a market value of $411 billion. While it's certainly possible for Facebook to become the most valuable company in the world, I don't see it happening anytime soon. Even if it did happen in 10 years, you may only quadruple your investment. That's what I see as a best-case scenario. Worst case, is that investors realize in a year or two that as hot as the company is, it is simply not worth Google, let alone Apple.

While I don't expect people that invest in Facebook to lose money, I don't expect people to make barrels of monkeys on it either.

There are plenty of undervalued companies that are going to increase by 10-100 times in the next few years, they may just not have the name Facebook.

B.

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