There has been tons of hype about Facebook’s IPO as the company starts to officially sell stock to the public on May 18th.
With an estimated valuation of just over $100 billion, it seems as if the emotion and love of Facebook has trumped what should be more important criterion for valuing a company: earnings/profits, room for growth and executive structure.
But is buying Facebook stock a wise financial move and what are some of the potential pitfalls? Here are five reasons why I’m not buying Facebook stock when it debuts on the NASDAQ:
1. History Shows New Tech Stocks Are Risky: When we look at past tech IPOs from Groupon, which went public last November, the stock jumped $6 on its first day of trading, but to date is down double digits! Pandora, which went public last summer, is now down almost 40%.
2. The “Everyday Investors” Lose Out: With new stocks, the big institutional investors get to buy the stock before it hits the markets at a cheaper price – so by the time the stock is officially trading on the NYSE or the NASDAQ, these big investors are selling off their stock at a profit during the first few hours/days after the stock opens up.
3. Can Facebook Please its Shareholders?: Now a public company, Facebook must focus on earning profits every quarter to please its shareholders – that’s the goal of a public company. But it remains to be seen if Facebook CEO Mark Zuckerberg shares that same goal. Zuckerberg wrote the following in a letter to potential shareholders: “Simply put: we don’t build services to make money; we make money to build better services.” Huh?
4. Will Facebook Continue to Make Money?: General Motors just announced that it’s pulling all Facebook ads (worth some $10 million), claiming the ads are ineffective. Also, most users visit Facebook on their smartphones, rather than on PCs, according to comScore (441 minutes on Facebook’s mobile app vs. 391 on Facebook on the computer) – and the mobile version of Facebook does not have ads yet, which is another red flag. Additionally, an AP/CNBC poll showed that 83% of users don’t click on Facebook’s ads.
5. Investing With Emotion is Risky: While most of us love and use Facebook on a daily basis, this doesn’t mean the stock is a guaranteed winner. I caution consumers to do their homework and take a step back before immediately jumping into a stock simply because they love the company’s product.
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