Best of the Week
Most Popular
1.The Trump Reset, US Empire's Coming Economic, Cyber and Military War With China (2/2) - Nadeem_Walayat
2.Now Is the Time to Buy Gold - 5th Jan 17 - John Grandits
3.CIA Planning Rogue President Donald Trump Assassination? Elites "Manchurian Candidate" Plan B - Nadeem_Walayat
4.The Trump Reset - Regime Change, Russia the Over Hyped Fake News SuperPower (Part1) - Nadeem_Walayat
5.Most Popular Financial Markets Analysis of 2016 - Stock Market Crash Postponed Again - Nadeem_Walayat
6.No UK House Prices Brexit Crash 2016 Despite London Weakness, Forecast 2017 - Nadeem_Walayat
7.President Trump Understands the NSA, CIA... LIE, America's Intelligence Agencies Crime Syndicate! -Nadeem_Walayat
8.President Donald Trump's 2017 New Year Message, BBC Fake News, Was 2016 a Dream? - Nadeem_Walayat
9.Major Stocks Bear Market Still Looms - Zeal_LLC
10.Biased 2017 Forecasts - Debt, Housing and Stock Market (1/2) - James_Quinn
Last 7 days
The Trump RESET Starts on US Presidential Inauguration Day 2017 - What to Expect - 20th Jan 17
Will the CIA Assassinate Rogue President Donald Trump Like JFK? - 19th Jan 17
Bonds, Dollar, Stocks, Gold, Silver Major Markets at Turning Points - 19th Jan 17
Populism; the Danger? What About Debt? - 19th Jan 17
Gold Price 50-DMA Breakout - 19th Jan 17
Turkey, 'Axis of Gold' and End of US Dollar Hegemony - 19th Jan 17
The Most Important Market Chart on the Planet - 19th Jan 17
Trump Deficits Will Be Huge - 19th Jan 17
Stock Market Trading Patience Pays Off with CHK Using Momentum Reversals - 19th Jan 17
Gold - How to "Buy Low and Sell High" Like a Pro - 19th Jan 17
State of the Global Stock, Financial and Commodity Markets Report 2017 - 19th Jan 17
The Hunt for Russia's Next Enemy - 18th Jan 17
Returning Gold Bulls - 18th Jan 17
Biotech Breakthrough Could Create A $11.4 Trillion Opportunity - 18th Jan 17
Bitcoin and Gold - Outlook, Volatility and Safe Haven Diversification - 17th Jan 17
Stock Market Uptrend on Borrowed Time - 17th Jan 17
The One Stock to Retire On - 17th Jan 17
Trump anti-Communist Counter Revolution - 17th Jan 17
US Stock Market Update as the Trump Inauguration Approaches - 17th Jan 17
The American Crisis - Common Sense 2017 - 17th Jan 17
Obama Leaves, Hope Arrives, Will Stupid Stay? - 17th Jan 17
Damage Inflicted by Precious Metals Manipulation Is in the “Multi Billions” - Keith Neumeyer - 17th Jan 17
Gold Price Forecast 2017 Update - Video - 17th Jan 17
The Story of the U.S. Regime Change Plan in the Philippines - 16th Jan 17
Gold Price 2017 Trending Towards $1375 as Forecast - 16th Jan 17
'Deep State' CIA Director States We are Not NAZI's, Warns Trump Does Not Understand Russian Threat - 15th Jan 17
UK House Prices Forecast 2017 - Crash or Bull Market? - Video - 15th Jan 17
SPX Stocks Bull Market Update - 14th Jan 17
President Trump vs the Deep State that Hides in Plain Sight - 14th Jan 17
The Impact of Sir Alex Ferguson's Retirement on Man United's Share Price - 14th Jan 17
What Can Stock Market Tell You About Politics? - 13th Jan 17
Big Gold Buying Coming 2017 - 13th Jan 17
A Bullish Case for Gold 2017 - 13th Jan 17
Will Stocks Bull Market Continue to Charge or is it Time to Sell the News - 13th Jan 17
Gold and Silver Off To Shining Start to 2017 - 13th Jan 17
Gold’s Fundamental Outlook for 2017 - 13th Jan 17
Is trading stocks and shares just as luck-based as roulette? - 13th Jan 17
Trump CIA Like Nazi Germany - Fake MI6 Intelligence leaked to Fake News Mainstream Media - 13th Jan 17
USD in Decline. SPX and TNX May Follow - 12th Jan 17
CIA War On Trump - Leaks Fake MI6 Intelligence to Fake News Broadcast Media - 12th Jan 17

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

State of Global Markets 2017 - Report

Facebook IPO Facts - The Good, The Bad and The Ugly

Companies / Corporate News May 17, 2012 - 07:42 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleShah Gilani writes: Face it, you want it. It seems that everyone wants a piece of the Facebook IPO.

But, can you handle the truth? Will the hyped sensationalism be a boon or a boondoggle?

I'm not going to tell you what to do, whether you should buy Facebook sooner rather than later. That's up to you.


However, I will tell you that I won't be buying it right away, but, I will be buying it if...

First though, here's the good the bad and the ugly truth about the company, the IPO and owning "FB."

The Good News About the Facebook IPO

The good news is overwhelming if you're Mark Zuckerberg, any of the company's founders, executives, or venture capital backers, many of whom own Facebook stock (Nasdaq: FB) at a dollar a share.

So far, the target range the stock is expected to be priced at--which was originally $28-$35/share-- has been raised to between $34-$38.

And it could very well go higher before tonight's pricing deadline. The amount of shares to be floated is being raised too.

That's all good news for the insiders, the underwriters and the company itself.

FB is causing its own IPO hype, partly because it will be the largest IPO in U.S. history, in terms of the value it will put on the company, which will likely approach $100 billion. However, Visa in 2008 and GM in 2010 will have raised more money on their IPO debuts. (I know, calling GM's IPO a debut is strange to me too.)

Facebook will raise at least $13 billion (at the lowest end of the price and share offering range) and bank some $9 billion in cash on its balance sheet. That's good news.

But better than that, the company will now have a huge hoard of stock as currency to use to buy up companies and technology to advance its master of the social media universe status.

The other good news is that... The other good news is that the stock will become a must-have on many growth managers' buy lists. Frenzied buying by institutional money managers could push the stock higher on its opening day and shortly after.

In addition to initial institutional interest, in short order, FB-- because of its size-- will likely be added to the NASDAQ Composite and eventually the S&P 500 index.

While the NASDAQ OMX Group wants to include FB as soon as possible, it will have to wait the three months it has set aside for that to happen. As far as being included in the S&P 500, that will take at least six months and will probably require FB's "float" (the number of shares available to trade to the public) to exceed 50% of all shares outstanding.

The IPO will only release about 15% of FB's total shares, but more shares will be freed up after the 4-6 month "lock-up" period that restricts certain insiders from selling right away.

Whenever a company is added to a major index, its stock price usually rises because money mangers and index funds have to buy it to keep their portfolios in balance with their benchmarks.

But, be forewarned, the stock won't jump on the day it is added to either index. It will jump on the day of the announcement that it will be added.

The rest of the good news about the IPO and owning FB remains to be seen.

With its new war chest of stock currency, questions will abound about what Zuckerberg, who will control some 61% of the voting stock, will do to grow the company in terms of hires, acquisitions and technology advancements.

To me, the good news about owning FB is that it will be a giant among giants and I believe will change the nature of the Internet, commerce and our lives.

The Bad News About the Facebook IPO

The bad news about FB's IPO is all its hype. And that has me worried for several reasons.

In terms of market metrics, FB will come out saddled with high relative price/earnings multiples and high growth prospects. Both of those can turn around in a flash and disappoint investors in a big way.

As far as earnings, the first quarter of 2012 saw lower earnings than the first quarter of 2011. That's not a good start for the company's debut. Based on the expected price range and the company's valuation, the price earnings multiple looks to be around 100.

Of the 33 companies that have a market cap of more than $77 billion (the low end of the offering), only two, Amazon.com and Bank of America have multiples of 100 or higher. Amazon is its own story and Bank of America is so high because its earnings are so low.

Makes you wonder, doesn't it?

Then there's all the hype that accompanied LinkedIn (NYSE: LNKD) and Groupon's IPOs. LinkedIn had a PE of 200 when it came out, rose 31% its first day then fell by one third promptly. Groupon (Nasdaq: GRPN) has had to restate its financials and after a hyped IPO is trading two thirds of its IPO price.

Makes you wonder, doesn't it?

Then There Was the Ugly

So much for the Bad. The Ugly is worse.

It's May. The markets are in a state of decline. Any macro implosion in Europe (it's already happening) or China (its already happening) could take U.S. stocks lower and Facebook along with them.

If FB comes out of the cannon and shoots for the stars, it may well overshoot any safety net that sensible investors might expect is a floor where the stock could become a buy.

The really ugly scenario is that the IPO causes a massive influx of public investors to bid up the stock and have to then dump it hand over fist if a quick drop triggers margin calls or an out right panic exodus.

My money is patient. I'll be watching the show from the sidelines.

What's important to me is how the stock looks and "feels" in the days and weeks after the IPO. Face it, Facebook isn't going to trade at 200 times earnings any time soon, so don't expect it to double.

And about those earnings. Any time a company warns about its earnings BEFORE they go public, as Facebook just did, I'm going to be prudent and not someone's put option.

What will I likely do? I'll look to buy on any big dips, especially the ones that may come after the lock-up period expires and all those billionaires and multimillionaire insiders want to sell and bid up the price of mega yachts and Sand Hill real estate.

Face it; Facebook is going to be long story. I'm not in a rush to hit it at the top--especially when the top looks like where the stock is coming out.

Source :http://moneymorning.com/2012/05/17/the-facebook-ipo-facts-the-good-the-bad-and-the-ugly/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife