Facebook IPO | The 5 Biggest Risks with Facebook Stock

Facebook IPO

As the 800 pound gorilla of social media marketing, Facebook Inc. (FB), gets its launch today on the NASDAQ, we ask what are the biggest risks with investing in this stock.

With a valuation of over $100 billion and an initial price set at $38, the Facebook IPO has been eagerly awaited by fans and speculators everywhere. While many believe they are going to make a killing by buying the stock today, not everybody is convinced.

We also recommend you watch the video version of this article below:

1. “Muppet Bait”

According to the Wall Street Journal, Goldman Sachs and a whole bunch of other Wall Street “BS artists” are now prepared to sell fifty per cent of their holdings in Facebook – before the stock has even launched on the market!

These guys are pretty smart and they know what they are doing. You have to ask yourself why they are selling so much of their holdings now? I certainly wouldn’t want to be on the receiving end of those shares.

My suspicion is that much of the demand for Facebook right now is not institutional but actually retail. That in itself is a red flag – opening the likelihood that the Facebook IPO is in fact “muppet bait”.

**As a side note, Greg Smith, the ex-director of Goldman Sachs who resigned his position this year, claimed that the firm was treating their own clients like “muppets” – knowingly selling worthless assets to their clients.**

2. Not Another Google

Too much is made of the fact that Facebook could do what Google did in the first year of its launch and triple in value. Some even argue that it will do better than Google.

I am very sceptical of these claims. Google, at the time of its launch in 2004, was extremely undervalued. Let’s not forget that 2004 was just a few years after one of the major crashes in history – the dot com Technology crash of 2001.

The memory of that event was still fresh in people’s minds and many were simply not prepared to approach yet another Tech stock.

Contrast that with today and Facebook has a “cult status” surrounding it, to an extent that Google never had at the time of its launch.

As a follower of the Warren Buffett principle that “when others get greedy, you should be fearful”, I am going to approach the frenzy surrounding the Facebook IPO with extreme caution.

3. Fundamental Differences

Here is a question for you: When was the last time you clicked on one of the ads inside Facebook? Personally, I can’t remember if I ever have.

Facebook makes the majority of its revenue from advertising. So does Google. But there is a major difference here.

I go to Google to search for something in particular, and as part of my search I may click on an ad in the process. But I don’t go to Facebook to do that – I go to Facebook to interact and connect with other people.

Facebook may well have an advantage over Google in that it has far more information about you and me (our likes, dislikes, where we live, work and eat), but so far it is not clear how it is going to monetize that by marketing and advertising on its pages alone.

4. IPOs: Technical Risks

IPOs in general tend to be very risky and that is a major reason why I avoid them.

The first few weeks (let alone the first day) of an IPO can be extremely volatile and the stock can behave in unpredictable and erratic was (see the above video for examples).

The major risk is that the stock may tank from the get-go and like LinkedIn, lose a third of its value (if nor more) in its first month.

I have found that the safest option is to be patient, allow the honeymoon period to end and allow the stock to come back down to Earth.

There is no doubt that Facebook, upon its launch, is going to be very volatile. I am not worried if it “skyrockets” to $50. In the case of the Google IPO, you could have bought it at the same price it was launched at almost 2 weeks later.

The lesson is don’t go to the market – let it come to you

5. The “Everybody Gets Rich” Paradox

When it comes to Facebook and the mania of millions of people hoping to make a killing from buying its stock on Friday – remember these four rules by Jeff deGraaf:

1. It is impossible for everyone to be rich.
2. It is impossible for everyone to get rich following a similar strategy.
3. Comfortable strategies tend to attract everybody.
4. See rule 1 to clarify the problem of rule 3.

Enough said.

What are your own views on the Faceook IPO? Do you see any other risks involved that were not mentioned here? Or do you disagree and believe that this could be a missed opportunity? Let us know and leave your comments below.

One Comment

  1. Have a look at this great analysis about which bankers and dealers will get $4 Billion richer

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