On May 18, 2011, LinkedIn went public, with an IPO value of $406 million. On November 3, 2011, Groupon’s IPO was valued at $805 million. On December 15, 2011, Zynga’s IPO was valued at $1 billion. On August 18, 2004, Google’s IPO value was $1.92 billion.
And then there was Facebook, which outdid them all.
The social network giant sold 421.2 million shares at a price of $38, and raised a record $16 billion on its public debut on Friday…making it the largest internet IPO ever, and the second largest IPO in US history (behind Visa’s $17.9 billion IPO in 2008).
Starting out, the IPO was nothing short of a frenzy. The investing community, and the media, created a lot…a whole lot….of hype around it. So much hype that retail investors took something like 20% of the IPO, a record for a new issue (typically retail investors access to an IPO is limited, and only available by making limit orders to stem volatility).
But while small investor demand was high, the ‘smart money’ was getting out…more than half of the 421.2 million shares in the offer came from insiders cashing out. Facebook executives and directors sold 189.4 million shares (after increasing the planned number by 62%). Goldman Sachs sold 28.7 million shares. Venture capital firm Accel offered 49 million.
For those insiders, it paid off. Facebook shares have been trading on the private market for over four years…one buyer grabbed shares in April 2008 for $3.50 (according to data released by CNBC). But now, it should raise at least a little caution when insiders are unloading their positions.
That’s not the only reason for caution. Much of the talk has, of course, focused on valuations, which are frothy…with the IPO price, the company is valued at 107 times earnings. But it’s the reality on the ground that’s a concern, too. The reality is that revenue growth is slowing: while revenue was up 88% in 2011…that didn’t match the 154% gain in 2010 (and growth slowed to 45% in the first quarter of this year). And the reality is that membership growth will slow…because it has no choice. Facebook currently has 901 million active monthly users (anyone who clicks on a “Like” button is a user – so it’s fair to say this number is exaggerated). Over the course of the past four years, “users” grew from 66 million to 800 million. If that pace continued over the next four years, Facebook would end up with 9.7 billion users. Considering that the entire human population is 7 billion, Facebook’s user base will inevitably slow.
Putting all of that aside, betting on Facebook is the same as betting on Mark Zuckerberg. Since he retained 57% of the voting power, he is in control. And he has already proven that he is willing to make decisions on his own accord (he went ahead with the acquisition of Instagram without consulting anyone…or possibly even overriding the board).
That said, the buzz around Facebook is understandable. In just eight years, it has evolved from a dorm room project to a company worth over $100 billion. But we need to remember that Facebook the company, and Facebook the stock, are not the same thing.
Facebook dove headfirst into the market. But after an inordinate amount of media attention, by the end of its first trading day, the stock failed to provide the first-day “pop” that investors were waiting for (the average first-day pop for a tech stock is 32%).
The excitement swirling around the IPO, or the relentless media coverage, or the historical relevance are not reasons to buy this stock. It’s important to remember that where there is upside potential, there is also downside risk. Unless investors have an iron stomach to cope with a lot of volatility, instead of buying into the enthusiasm, it would be better to allow the stock (or any IPO stock for that matter) to ‘season’ for a while before jumping in.