Facebook's IPO

Unless you live in a cave you know that Facebook is scheduled to come public tomorrow.  I almost never talk about individual stocks here.  I will not be participating in the initial public offering {IPO} of the stock for clients as I do not participate ever in IPOs and have no opinion on how the stock will do.  Forbes has a blog post on why they suggest you should stay away.  I think they make some valid points.  I'll throw in three more.

1.}  Bloomberg by way of the San Francisco Chronicle's Blog noted the other day  that at current levels Facebook would trade at 26 times sales.   That is an extremely high valuation.  The article notes that more than double Google's price to sales when the stock debuted back in 2004.  At that level everything needs to go perfectly for the stock to justify that kind of valuation.  

2.}  The Wall Street Journal online is reporting that insiders are cashing out at a much greater percentage than they have in most recent IPOs.  {Subscription may be required to access this article}.

3.}  The real red flag though in my book is that I'm being told by the Boston Boys and a few others that the lead manager, Morgan Stanley, is telling its retail brokers that they can get all the stock they want.  This is never a good sign.  Retail investors always occupy the bottom rung when it comes to IPOs.  Always have and always will.  No institution will pass on the free money that hot IPOs typically offer.  I don't care if it's just a couple of bucks, if it looks like a profit, then institutions and hedge funds will find room for it.  The fact that they're taking a pass may at the end of the day mean nothing, but to me this is a warning. 

Now look, I have no idea what's going to happen to Facebook when it starts trading.  For all I know it's the next Google and is set to double in the next year or maybe even by next week.  If it does, I'm sure in an indirect way my clients will participate as it will eventually make it's way into the ETF universe.  But there are enough fleas on this dog to at least say to people who might want to get involved to do so with open eyes.  I do know that if I was going to get involved, I'd have an exit strategy in place.  Also there's no way I would buy this in the aftermarket.  That is I'd definitely stay away if I couldn't get shares in the IPO.  I would absolutely not buy shares of this after it starts trading if I was an individual investor.

Two final thoughts:

What could really kill this market would be for Facebook to bomb out of the gate.  The individual investor already thinks he's getting screwed by Wall Street.  To have this open down 10-15% from its opening price I believe would just reinforce that perception, particularly with such heavy retail investor interest.

Also in a certain way I'd hate to be the retail broker with shares in this deal.  In one sense it can be a great way to build relationships with current clients and get a foot in the door with prospects if the deal does well.  It will also be a pretty good payday for these folks as well.  But here's the problem.  If it pops on its open, that is if it opens up 10-30%, there will be a huge temptation to take profits.  If a broker does this then he'd better hope that he's selling near the top.  If it is the next Google and it goes on to double in the next year or so then all the clients he sold stock for are going to remember that.  Facebook after all is not just some tech company the public has never heard of.  It's the classic Peter Lynch "buy what you know stock".  With over a billion users, investors know what Facebook is.  They will remember how their brokers handle this going forward.  This is also a problem if the broker doesn't sell the pop and then it heads lower, depriving their clients of any gains and it's really an issue if the stock tanks on the open.

Stay tuned.......

*No interest in the Facebook deal.  My clients own no shares of Google but it is a component of several ETFs that we own for both clients and in our personal accounts.