Everyone’s talking about the Facebook IPO — and for good reason.
Facebook is currently valued at around $100 billion, though it made less than $4 billion in revenue last year. Still, if the social network with more than 901 million users plays its cards right, it could be the world’s first $1 trillion company by 2014.
The Facebook IPO is slated for Friday. New investors can potentially buy around 421 million shares of Facebook stock at $38 a pop.
The big question is: should you buy Facebook stock while it’s hot? Multiple financial experts told us no — at $38 per share, the stock is overpriced.
Former NYU Stern School of Business finance professor Kenneth Froewiss believes adding Facebook to a portfolio early on is risky for experienced pros and investment amateurs alike. It’s like playing the lottery, he says.
“Even for those individuals with above-average net worth, purchasing shares at an IPO, especially a ‘hot’ one that has been widely hyped, is rarely a good idea,” Froewiss says.
“Might someone on occasion reap a tremendous windfall by doing so? Yes, but then again, on occasion someone wins the lottery. That does not make the lottery a great investment in general.”
Factors that can affect Facebook stock are legion. The current excitement about the company’s stock market debut doesn’t guarantee long-term interest or success.
“In my experience this stock and its IPO has seen more enthusiasm than any other I have seen over my 40 years of investment experience,” says Lewis Altfest, Ph.D., CEO of NYC-based Altfest Personal Wealth Management.
The social network’s success or failure may lie in its ability to conquer the mobile space — which is growing faster than the company is adapting. Post-IPO, Facebook will have to ramp up its mobile ads to push profits.
Facebook reported $205 million in the first quarter of 2012 — down from December’s high of $302 million. “Revenue in the last quarter was actually off quarter-to-quarter,” Altfest says. “They have to deliver revenue growth. Over a longer period, they will have to deliver earnings.”
Altfest advises average consumers wait at least six months. He warns in the following weeks after the IPO, demand will cause stock prices to stay high, which is normal for an IPO debut. But it may eventually fall.
“Even in stocks there are laws of gravity,” he says. “Take a deep breath and come back in six months.”
Joshua Gans, professor at University at Toronto’s School of Management, advises people do nothing instead. “All of the uncertainties surrounding Facebook will not get resolved in the six months,” Gans says. “We’ll only know a decade from now whether it has a permanent place in the economy like Microsoft.”
Microsoft traded at $22 per share at its IPO in 1986. Now it’s $61 per share.
“There’s a scenario where Facebook clearly becomes the next Google or Apple, but there’s also a scenario where it simply does not and it ends up more like Yahoo,” Gans tells Mashable.
A safer alternative is buying into an index fund such as the S&P 500 instead of buying Facebook shares directly. Owners of an index fund can reap the benefits of the entire stock index doing well — without suffering sudden losses when a company’s stock tanks.
“Facebook will eventually be included in that, and it will be part of an index fund and you can buy it that way,” Gans says.
Some financial experts see Facebook as a good buy now. Lubos Pastor, finance professor at the University of Chicago, says it’s financially beneficial for investors to buy shares at IPO price. After the price of public shares rise, users have “historically earned subpar returns”, he says.
“However, the poor average post-IPO returns have been driven mostly by small firms, so it is quite possible that a large firm like Facebook will turn out to be a good investment,” Pastor says.