Financial adviser Jack J. Clark says a client recently announced an urge to “buy Facebook stock today to make up for missing out on buying Google” when the search engine company went public in 2004.
Clark brought up two issues right away: Facebook stock hasn’t even gone public yet, and buying red-hot technology stocks isn’t part of that client’s financial plan for retirement.
Facebook Inc. filed paperwork with regulators on Feb. 1 to raise a targeted $5 billion in its much-anticipated initial public offering. But the social-networking site could tap investors for as much as $10 billion, valuing the company at $100 billion.
The case for buying Facebook is that it is the biggest Internet deal since Google (symbol: GOOG). There are some 800 million Facebook users worldwide, and that means a $10 billion IPO values each user at around $125. How does Facebook make money? The site sells data it gathers about our private lives and our personal information to advertisers.
Though valuations do matter in the long term, good luck determining what Facebook is really worth, says Clark, who with a partner founded Clark & Goshow Financial Strategies Group in Malvern. Despite any analysis, “I would argue the typical investor has no idea of the valuation or what numbers have meaning. It’s mostly crystal ball right now.”
Instead, he likens buying Facebook’s IPO to buying a Powerball ticket or gambling at Parx and SugarHouse. “Those who will make money will be the company executives and early investors, and I’ll bet most of them don’t have a target price in mind nor the discipline to walk away if and when their target price is hit.”
Most advisers say IPOs aren’t suitable for lower-risk portfolios or those living on their investments or a fixed income. And it’s a mistake to invest based on regret, he adds. “Paraphrasing Warren Buffet, you need two things to be successful: a reasonable plan and the ability to stick to it. Sticking to it is the hard part.”
If Facebook is like any of the other Internet IPOs that have come along in the last year, expect extreme swings in price. Among those that have gone public recently are Zynga (ZNGA), Zillow (Z), LinkedIn (LKND), Angie’s List (ANGI), Jive Software (JIVE), Pandora Media (P), Groupon (GRPN), and FriendFinder Networks (FFN). As an example, FriendFinder in the last year has ranged in price between $10 and 50 cents a share.
If you absolutely MUST buy Facebook stock, buy it with money from your entertainment bucket, the casino money you would otherwise take to Atlantic City. Because that money clearly isn’t as valuable to you. And just remember, buying Facebook stock and investing are not the same thing.
I speak from personal experience: In 1999, I was working at TheStreet.com, (TST) when the Internet-based stock news service went public in an IPO underwritten by Goldman Sachs. Priced at $70 a share on the first day of trading, TheStreet stock never saw that price again.
My then-boss, Dave Kansas, wrote (http://on.wsj.com/xWQwwm) about buying into a dying supernova that was the hot tech IPO when we both worked at TheStreet.com. He was a millionaire at the IPO price on the first day of trading. (I had only 300 shares, thus I was briefly a “thousandaire” on paper for one day. Years later, I sold for $3 a share, reaping $900).
TheStreet.com, 12 years later, operates at a loss. It has operated at a profit rarely since the IPO, and now trades around a dollar.
So, if you’re young and in a position to take a ridiculous risk (like I was) and buying hot tech stocks is part of your financial plan, then wait for the Facebook IPO period to end and the initial euphoria to end, then roll the dice.