Is Facebook a good investment? The social media company is expected to announce that it will go public with an initial public offering, IPO, valued at around $5 Billion. If you are a big institutional investor and favored client of Morgan Stanley, who will be handling the IPO, you get to buy Facebook stock at the stated IPO price, before the stock goes public. If you are one of the rest of us you get to buy Facebook stock through your broker or on line after the stock goes public. Is Facebook a good investment for the large institutional investor that buys at the IPO price prior to stock trading? Typically it is. There a couple of factors here. One is that companies like Morgan Stanley engage in sophisticated technical and fundamental analysis of the companies they will offer at IPO. They commonly set the IPO price so that the stock will go up instead of down on the first day. They also try to set the IPO price so that it does not go up too much the first day. After all, the client, Facebook, wants to raise $5 Billion or whatever the amount will be. If they can get more they will but they do not want to issue $5 Billion worth of Facebook stock one day, see the stock price immediately triple, and see that people are paying $15 Billion for the same batch of stock the next day.
If you are one of the rest of us is Facebook a good investment? To answer this we might want to ask ourselves just why this private company is selling stock. First of all selling stock allows a company to raise money without borrowing or drawing down on its cash reserves. However, the private owners of the company are giving away part of the value of the company when they do so. Do they need money? If so is the money for
R&D or to pay off loans? Just how well is the company doing? Is the money they intend to raise from the IPO going to key employees as a reward for their hard work in building the company? Do these employees have stock options that they have been promised? If so, many key Facebook employees could get rich, just as others did with Microsoft and other tech companies. Will employee stocks be issued separately or as part of the IPO. Will employee stock options dilute the value of Facebook stock? Is the money simply going into the pockets of the founders of the company? Everyone likes a little cash and maybe this is a nice way for the current owners of Facebook to diversify a little and not put all of their eggs in the “Facebook basket.” How to make money through investments is often to take your profits every so often and diversify a bit. This may be what the guys at Facebook are going to do. So, is Facebook a good investment for you and me? It will be if the stock price goes up and stays up. It will be a good short term investment for those who accurately assess fundamentals and market sentiment, buying on downturns and selling after rallies. Is Facebook a good investment in a long term? Microsoft made its early stock investors a lot of money before its stock price leveled off. The question for long term investors is just what Facebook can do to further monetize its name and technology. Stay tuned.