For the past several weeks Facebook has been dominant in the financial press. What would be the initial price ($38), how many shares would be sold (422 M) and how high would it go the first day ($45)? Facebook was the talk of everyone who used it and therefore thought it would be a great stock to own! Often when an IPO is issued it goes up dramatically, not everyone gets to participate (meaning the small investor is left out) and it makes the early investors wealthy. So far none of these is the case with Facebook. The stock at this writing, late in the day on Friday, is back to where it started after having risen briefly in early trading. Just about everyone who wanted stock got it, including the small investor. The early birds in the IPO did not get wealthy the first day! This is also the first time in years that I had clients calling us up wanting to buy this stock. Why wouldn’t you want to own Facebook (or why would you want to own Facebook)? The dominant reason to own Facebook is that you like the product and you want to be a part of it! This is not a logical way to buy stocks; but it is not all that unusual either. When Facebook is analyzed on a fundamental basis it does not hold up. It has virtually no earnings relative to price. It was acknowledged during the filing of the IPO that the most prevalent use of Facebook is on smart phones and they have not figured out how to place advertising on this medium that will result in significant revenues. In the case of the basic system their biggest advertiser, General Motors, announced earlier this week they would no longer advertise on Facebook because it was resulting in no additional sales. The CFO of Facebook also indicated earlier in the week that a significant portion of the funds raised would go to attempting to find a way to get ad revenue on smart phones and there was no certainty of success. For now the syndicates that offered the IPO are doing their best (as they should) to support the price of the stock at its initial public offering price of $38. What will happen after the support period ends is anyone’s guess. My guess is that many individuals who wanted the stock bought it because it was a product they liked and they will keep the stock. Institutions that acquired shares did so in many cases because after the cooling off period of 60 days, Facebook will become part of the NASDAQ index. If you do any indexing you will need to own Facebook. The institutions, too, are unlikely to sell Facebook. It will be interesting to watch how Facebook does even as the S&P 500, which started the year at 1277, reached a high on April 2nd of 1419, and has now receded to 1293, or a drop of 9%, having lost almost all of the gains since the beginning of the year. We may be headed into Bear Market territory (loss of 20% from the high). Facebook has made it interesting during this past month. Anticipation can really be fun!
Ed
