skip to Main Content

Facebook Faceplants – Largest Ever Web IPO a Loser for Early Investors

Facebook’s IPO priced on May 17th. When it went public at $38 per share, it became the biggest internet IPO ever, so it has generated a significant amount of interest. This high level of interest has resulted in a very high valuation for the company. At the IPO price, the company was valued at a price-to-earnings ratio of over 100, versus the P/E on the S&P 500, which stands at 13.3 as of mid-May. As of the second day of trading, Facebook’s shares closed at a price over 10% below their IPO price, indicating that perhaps the valuation was too high and that investor interest too keen.

As illustrated by Facebook, oversubscribed IPOs can be very richly priced, which would limit the potential upside of investors. Even as the potential upside is limited by the valuation, the potential risk for IPOs is quite high. IPOs in general tend to be very volatile in the first few weeks of trading as the market “gets its legs”. There can be a lot of uncertainty about the proper value for a newly public company. Furthermore, IPOs, and especially technology IPOs, tend to involve companies in new industries that face uncertainty about their business models and as such face additional hurdles to becoming successful investments.

Recent performance of Web 2.0 IPOs has been mixed, and it illustrates the risk of these sorts of investments. In addition to market risk, investors bear the risk of the company generating the sort of sales and earnings growth needed to justify relatively high valuations. There may also be difficulties related to becoming a public company for the first time, as illustrated by Groupon’s accounting irregularities over the past several months:

  • LinkedIn – public offering in May 2011, up almost 150% from the IPO price.
  • Zynga – public offering in December 2011, down about 16% from the IPO price.
  • Groupon – public offering in November 2011, down almost 50% from the IPO price.

As of the second day of trading, Facebook has not been a successful example of an internet IPO, and has closed more than 10% below its IPO price. Time will tell whether Facebook will deliver the sort of sales and earnings growth that would justify its valuation, although investors face hurdles from both the company’s price and the company’s untested business model before this turns out to be a successful investment.

We don’t invest in IPOs as part of our general investment discipline. I think Warren Buffet’s statement captures the appropriate sense of skepticism and common sense that a rational investor would use to approach IPO investing:

“It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).”

 

Important Disclosure Information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable. Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This communication is not a substitute for personalized advice from RegentAtlantic. This information is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

Please note that this communication is not a recommendation to purchase or sell any security mentioned.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

Back To Top