{"id":29860,"date":"2012-05-25T06:20:44","date_gmt":"2012-05-25T10:20:44","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/05\/5-reasons-i-avoided-the-facebook-ipo-and-two-alternative-plays\/"},"modified":"2012-05-25T06:20:44","modified_gmt":"2012-05-25T10:20:44","slug":"5-reasons-i-avoided-the-facebook-ipo-and-two-alternative-plays","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/05\/25\/5-reasons-i-avoided-the-facebook-ipo-and-two-alternative-plays\/","title":{"rendered":"5 Reasons I Avoided the Facebook IPO, and Two Alternative Plays"},"content":{"rendered":"

Article by Investment U<\/a> <\/p>\n

\"5<\/p>\n

"Believe me when I say I\u2019m not down on Facebook. I just don\u2019t feel comfortable with the valuation in regards to the IPO."<\/p>\n<\/div>\n

Although I wasn\u2019t high on Facebook\u2019s IPO last week, I do think there\u2019s some potential in the company down the road. I just don\u2019t feel comfortable buying shares right now. It\u2019s all about the price, and Facebook has a lot of \u201cifs\u201d cooked into its current price\u2026<\/p>\n

In a minute I\u2019ll share a couple of ways to capture some of Facebook\u2019s potential without plunking down for its overpriced shares. But first, let\u2019s take a look back at why I\u2019m not sold on its current valuation.<\/p>\n

In a February essay, Facebook IPO: Nowhere to go but Down<\/a>,<\/em> I was little skeptical about possibly the biggest IPO ever. And here\u2019s a little recap about why I felt that way:<\/p>\n

1. Very High P\/E<\/strong><\/p>\n

First of all, if Facebook’s shares were actually going to sell at their high end of around $35, that will place a nearly 100 P\/E valuation on the company. I think it\u2019s safe to say that this would give the stock maybe the highest P\/E of anything trading on the S&P 500. According to Rick Summers of Morningstar<\/em>, Facebook could only justify such a high valuation if “the company makes $40 billion in revenue within the next six to seven years while maintaining the same profit margins.”As I\u2019ve written before, <\/strong>any slip up after this IPO valuation will cause a decrease in value.<\/p>\n

2. Slowing Ad Revenue<\/strong><\/p>\n

My next point relates to first quarter 2012. Facebook knocked it out of the park with regards to earnings and revenue. However, those numbers were lower than the preceding quarter’s. What should be considered a red flag is that it seems the drop-off was largely due to a decrease in advertiser revenue.<\/p>\n

3. Where Will Growth Come From?<\/strong><\/p>\n

Then there\u2019s growth. Where will it come from? Facebook has over 800 million users that log in. Have they reached a saturation point? You can\u2019t just say, \u201cWe\u2019re going to take it over seas and explore more markets.\u201d This product isn\u2019t nicotine, where you can dump it in the Third World and continue growth. International growth can only happen where devices are accessible and the infrastructure is in place.<\/p>\n

4. The Tech IPO Trend<\/strong><\/p>\n

IPOs over the last year, except for Zynga<\/strong> (Nasdaq: ZNGA) \u2013 which just stunk it up at the beginning \u2013all follow a very distinct pattern. They all traded significantly higher at open, but then followed a downward trend. And this is where it gets interesting. Each and every stock that follows this trend reverses to post gains near 50% in a short period of time.<\/p>\n\n\n\n\n\n\n\n\n
Company<\/strong><\/td>\nTicker<\/strong><\/td>\n% Fall<\/strong><\/td>\n% Rise<\/strong><\/td>\n<\/tr>\n
Renren<\/td>\n(RENN)<\/td>\n70%<\/td>\n73%<\/td>\n<\/tr>\n
Linkedin<\/td>\n(LNKD)<\/td>\n50%<\/td>\n75%<\/td>\n<\/tr>\n
Pandora<\/td>\n(P)<\/td>\n50%<\/td>\n50%<\/td>\n<\/tr>\n
Zillow<\/td>\n(Z)<\/td>\n60%<\/td>\n55%<\/td>\n<\/tr>\n
Angie’s List<\/td>\n(ANGI)<\/td>\n40%<\/td>\n44%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Groupon later followed suit with a 50% fall from its high \u2013 only to see it rise 54% from that low in early December 2011.<\/p>\n

5. I Don\u2019t Have a Swiss Bank Account<\/strong><\/p>\n

Finally \u2013 and most importantly \u2013 I\u2019m not rich. If you think you’re going to buy Facebook shares right from the start, it ain\u2019t happening. Accredited investors are those with a net worth of more than $1 million (excluding their primary residence) or an annual income over $200,000 for the past two years can buy shares of private companies at online marketplaces such as SharesPost and SecondMarket. (Trading in shares of pre-IPO Facebook at both sites halted on March 30, at the request of the company, so that it could set its IPO price range.)<\/p>\n

Those initial shares are reserved for the venture capitalists, bankers, employees and Mr. Zuckerberg. Of course, you can try, and you certainly get in on day two or so, but at what, an inflated price?<\/p>\n

How to Make An Alternative Play<\/strong><\/h2>\n

Because of the way Wall Street works, the average investor needs to consider alternative ways to take advantage of the company going public. And financial advisers and planners have figured out indirect ways to be part of the Facebook action.<\/p>\n

1. Mutual Funds With Facebook Exposure<\/strong><\/p>\n

<\/strong>One of these means for regular investors to join the party is by investing in mutual funds that own slices of Facebook. The list is fairly large.<\/p>\n

T. Rowe Price (Nasdaq: TROW) has a group of funds that own Facebook, including the $30-billion T. Rowe Price Growth Stock Fund <\/strong>(PRGFX), with a 0.7% position. Several Morgan Stanley (NYSE: MS) Investment Management funds also own the Internet firm, including the $1.7-billion Morgan Stanley Focus Growth fund<\/strong> (AMOAX), which has a 3.6% holding. Fidelity Investments says more than 30 of its funds have invested in Facebook.<\/p>\n

Something new and interesting on the scene is the Global X Social Media Index Fund <\/strong>(Nasdaq: SOCL). SOCL made its debut late last year. Facebook is not yet in SOCL\u2019s lineup. However, SOCL is home to companies like Zynga, Google<\/strong> (Nasdaq: GOOG), LinkedIn<\/strong> (NYSE: LNKD) and plenty of well-known foreign social media firms<\/p>\n

You better believe that Facebook will very soon become one of SOCL\u2019s holdings. And with the $100-billion valuation for Facebook, it could be its largest holding. So you can play Facebook with an ETF pretty soon and with a heavy amount of exposure to the company.<\/p>\n

2. Invest in Related Companies<\/strong><\/p>\n

Another option, says financial adviser Robert Russell in Dayton, Ohio: buying shares of publicly traded companies that create apps for Facebook; including social gaming app developer Zynga Inc. and SNAP Interactive<\/strong> (OTC: STVI.PK), which has created a popular dating app. Mr. Russell says more investors could pile into these companies if Facebook’s stock takes off. “You can play the trickle-down effect coming from Facebook,” he says.<\/p>\n

You have to believe that Zynga will capitalize on the IPO. If you\u2019re on Facebook, you\u2019ve probably been saturated with \u201cMob Wars\u201d or \u201cFarmVille\u201d requests to the point of absolute annoyance. Well thank Zynga for that, because it\u2019s the company behind those games and several others.<\/p>\n

Zynga has already been mentioned as a possible takeover target for Facebook. After all, Zynga accounts for 12% of Facebook\u2019s revenue, according to Benzinga<\/em>. Zynga\u2019s current market value is about $9.4 billion, even if that doubles, Facebook could easily buy it after the IPO.<\/p>\n

The Take<\/strong><\/h2>\n

Believe me when I say I\u2019m not down on Facebook. I just don\u2019t feel comfortable with the valuation in regards to the IPO. I\u2019ve just seen the \u201cherd\u201d go crazy on too many occasions. But no matter what I say, this stock is going to be a popular one. So do what you can to profit from it while limiting your exposure to the volatility.<\/p>\n

Good Investing,<\/p>\n

Jason Jenkins<\/p>\n

\n<\/a> <\/a> <\/a> <\/a> <\/a>\n<\/div>\n

<\/p>\n

Article by Investment U<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"

Article by Investment U "Believe me when I say I\u2019m not down on Facebook. I just don\u2019t feel comfortable with the valuation in regards to the IPO." Although I wasn\u2019t high on Facebook\u2019s IPO last week, I do think there\u2019s some potential in the company down the road. I just don\u2019t feel comfortable buying shares … <\/p>\n

Continue reading “5 Reasons I Avoided the Facebook IPO, and Two Alternative Plays”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-29860","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/29860","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=29860"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/29860\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=29860"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=29860"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=29860"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}