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'Liking' Facebook's IPO could be problematic for retail investors

Fred Wilpon
FILE - In this Feb. 27, 2012 file photo, New York Mets owner Fred Wilpon watches his team during a spring training baseball workout in Port St. Lucie, Fla. In a trial that is set to begin Monday, March 19, 2012, the trustee recovering money for investors in imprisoned Bernard Madoff's Ponzi scheme will try to force the New York Mets owners to pay up to $303 million for distribution to less fortunate investors in the mammoth fraud. Trustee Irving Picard’s lawyers will try to convince a nine-person civil jury that the Mets owners believed that Madoff's business was a fraud but continued their investments anyway because they were making a lot of money. (AP Photo/Jeff Roberson, File)Paul Sakuma / AP


In the story below, corrected Tuesday, please read that Wall Street reporter Shayndi Raice said Facebook could generate $6 billion in revenues in 2012, and not comScore co-founder Gian Fulgoni, as originally reported. 

The buzz over Facebook’s forthcoming IPO has been propelled at least in part by retail investors hoping for a piece of the social media giant’s predicted $75 billion to $100 billion valuation.

But when the company’s stock eventually hits trading floors, Facebook fans who want to get in on the company’s initial public offering are likely to feel as left out as the Winklevoss twins.

Google’s 2004 IPO was conducted via a complicated auction process intended to level the playing field between big trading firms and the little guys. Absent such an arrangement, the advantage tends to go to the players with the most trading volume and money.

By the time your average online brokerage customer can get his or her hands on a stock like Facebook, it’s probably going to already be on an upward trajectory. And those investors hoping to buy on a dip should think twice.

Last year’s spate of tech IPOs saw the stock of companies such as LinkedIn and Zynga put on an initial bounce before stabilizing. However, the hype surrounding Facebook’s IPO has been building for so long that the stock price could stay elevated for longer than other recently debuted tech stocks, analysts say.

“The pool of small investors is so big, I think it’s going to support the stock for a while,” said Sam Hamadeh, founder and CEO of research company PrivCo.

Another issue for potential investors is the meteoric rise in valuation estimates for Facebook since its founding.

In 2005, the company was estimated to be worth $100 million. While the current valuation range has actually dropped a bit since some analysts suggested the company could be worth more than $100 billion, a more modest $75 billion valuation is still “very aggressive,” said Hamadeh.

Estimates for Facebook’s true value vary. Shayndi Raice, who covers the social media beat for The Wall Street Journal told CNBC in an interview Monday that it could generate $6 billion in revenue this year. (Hamadeh estimates Facebook had revenues of $3.8 billion in 2011.) 

In an event in Dallas over the weekend, Facebook’s COO Sheryl Sandberg talked about creating communities through social technology. If the company wants to fulfill its promise to shareholders it would do better to focus on its relationships with advertisers, said Nate Elliott, an analyst at Forrester Research.

“They need to get better at using the data they have,” he said. “They have to help the marketers who are spending there [to] improve the performance of the money they’re spending.”

Large companies in particular, Elliott said, are going to start demanding better returns on their advertising dollars.

To that end, Elliott suggested that Facebook could build or buy an ad platform with part of the $10 billion it hopes to net in an IPO. It also will have to pay more to recruit and retain top talent, since it won’t have pre-IPO options to woo employees.

Retail investors who don’t have the patience to wait could seek out a mutual fund specializing in IPOs, but think of it as a lottery ticket, not your retirement plan, Hamadeh cautioned.

“The track record for IPOs is not a great one,” he pointed out. The idea of an IPO market is to invest in a company’s potential while it’s still in its infancy. In the case of Facebook, Hamadeh said, its valuation already assumes five to tenfold growth.

“It could be dead money for the next five years until it catches up with that valuation,” he said.

In other words, retail investors hoping to cash in on the social media juggernaut will have to learn patience one way or another.

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