Facebook’s IPO Effects On Market And Investors – Who Are Willing To Buy It?

Posted on Feb 2 2012 - 9:31am by CONTRIBUTOR

Editor’s Note: Guest Author Ajeet Pratap Maurya is a Software Engineer specializing in .NET technologies and iOS development. After a long, tense wait, finally Facebook filled papers Wednesday i.e. yesterday to raise $5 billion in its initial public offering of stock. With this much funds the company would be valued approx. $75 billion. But the question is still there that what will be the effect of this IPO on the market and the investors who are willing to buy it. As we know this not the first time any tech company coming with its IPO. Analysts suspect the unconventional CEO will make some provision for Facebook’s 800m+ members – without whom, of course, he’d not have a business – to get in on the action, the Washington Post reports. Apart from this if we look at the company annual returns then according to bussinessInsider, Facebook’s revenues grew at a 127 percent annual rate to $3.8 billion in 2011 with operating profit of $1.5 billion. Here are the four reasonsthat why one of the biggest IPO is a non-event.

  • It’s grossly over-valued. On a price/sales basis, Facebook would trade at 19.7 — that’s 497 percent higher than Apple at 3.3 and 294 percent above Google’s P/S of 5. And assuming Facebook shares Google’s net margin of 26 percent, Facebook’s P/E of 80 is far higher than Google’s 19 or Apple’s 12.7. This means that Facebook’s stock might not hold up after the first-day IPO pop — the same fate that greeted most of 2011′s tech IPOs.
  • It won’t unleash corporate capital spending. In 1995, Netscape’s IPO spurred a wave of corporate capital spending. That’s because the web browser made the Internet easier for people to use than it had been before. A wave of supporting industries ranging from web consultants to makers of Web infrastructure — that got their fingers into the corporate Internet investment pie, as I described in my 1998 book, “Net Profit.” Facebook is not doing that — its revenues represent a mere 1 percent of the world’s $507 billion in total ad spending and its IPO would not lead to a major change in the trajectory of corporate spend.
  • It doesn’t change much for Facebook insiders. Facebook’s investors and employees were able — until last week when trading there was halted — to sell their shares for cash on SharesPost, a secondary market. On January 26th, Facebook was valued at $73.4 billion there — a few billion below the estimated IPO range. Sure, an IPO required by topping 500 shareholders will add to Facebook the cost of running a public company — but beyond that, things there should not change much.
  • It won’t boost the overall venture financing market. If a Facebook IPO created a fever to invest in tech start-ups, it might be good for the venture capital industry. But since the IPO does not change much for Facebook investors, does not spur the growth of a range of related industries, does not unleash corporate investment, and might not even help out the IPO market, the after-effect of Facebook’s IPO could be modest.

Generally the major bulk of the profit of a big IPO offering is gulped by Wall Street brokerage firms that handle the deals parceling out shares to hedge funds, mutual funds and some wealthy investors that generate big trading commissions. Retail investors can only manage to scramble to buy up shares on the first day of trading before the stock rises. This is so tricky a race that hardly any retail investor gets to buy any such share. But if you are in the league of small investors then you don’t have to think that you would miss the chance to be a part of this multi-billion-dollar IPO. As there is a good news for small investors that Facebook is expected to make some gesture in favor of its millions of users, and since it is indirectly a public forum website – a social gathering of common people.

So, if Facebook thinks of this as a good idea, it can take steps to make some portion of its IPO shares available to small investors. David Menlow, president of IPOfinancial.com, a research firm, said, “I guess there will be somewhat of an altruistic tone to the structure of the deal. It’s important for people who are Facebook users to at least have a priority in getting shares.” A successful Facebook IPO isn’t a bad thing, And it would be a surprise for me that a lot of small individual investors are willing to buy into Facebook thinking that its household name status, like Coke or IBM back in the day, means it’s a blue-chip buy–a steal at any price. There is no doubt that Facebook is certainly a big name in both tech world as well as individually, but how much growth power potential is there in a company that already has 845 million users, per its filing? I don’t doubt the company will be successful for a long time, but I also willing to point out the days when the long-aimed growth are over. In the end I would say what great investor Peter Lynch said: “Invest in what you know.”

(Image Source: FacebookFeatured Image)

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