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Facebook Stock IPO: Should you Buy it?

Last updated by on 3 Comments

The Wall Street Journal cited unnamed sources today who proclaim that Facebook is moving closer to an IPO early next year. Could this be one of those once in a generation type companies and stock buying opportunities?

It’s been speculated that Facebook is looking to raise $10 billion from the stock IPO, and achieve a measly market valuation of $100 billion (for comparison, Ford is valued at $38 billion and Yahoo is valued at $19 billion).

If you’re not sure what an IPO is – it’s an acronym for “initial public offering”. It basically means that Facebook would be raising significant capital to run its business through selling and opening up its stock to the public for the first, or initial time.

And if you’re not sure what an IPO is, that also is a telltale warning sign that you probably should not be buying the stock.

 facebook stock

Familiarity Does Not = Good Investment

Why not buy the stock of a company you know and love? Everyone knows Facebook and what it is. We have all likely used it at some point or another. Many of us every day. And many of us love it, at that. But that doesn’t necessarily mean that its stock and the fundamental business behind it will be successful.

Knowing what a business is or does is a good first step. But when you frequent a business, you tend to get emotionally connected to it. It would be easy (and dangerous) to assume that just because everyone knows and most use Facebook, its stock can only go up. Let’s pull the trigger, I don’t want to miss out on it if it explodes, right?! That kind of assumption and desire to turn a blind eye to business fundamentals can result in you getting burned.

Looking at some other famous internet IPO’s of the past year:

  • Groupon: now trades at $16, down almost 40% from its end of first day trading price of $26.
  • LinkedIn: now trades at $59, down 37% from its end of first day trading price of $94.
  • Pandora: now trades shy of $10, down 50% from its end of first day trading price of $19

I have used and like all three companies. And had I followed my emotions and bought them up right away without doing my homework, I would have lost significant money. Why? The businesses behind the stocks have failed to live up to their hype.

Now, don’t get me wrong. I’m not trying to deter you from buying Facebook stock. All I’m saying is this: do your homework beforehand & don’t just follow your emotions or the herd.

Before Buying Facebook Stock Right After its IPO, Consider These Questions…

Here are some questions that you might want to consider before jumping on the Facebook IPO, or any IPO:

  1. What is the company’s business model? How does it make money?
  2. How does it stack up against similar company’s in some of the key metrics (i.e. in Facebook’s case: revenue per user, revenue per 1,000 impressions).
  3. Can the price of whatever the company makes money from increase?
  4. How is it doing financially? Does its revenue growth rate warrant the likely price/earnings ratio it will command?
  5. Is the company’s growth rate increasing? Can it continue increasing?
  6. Does the company have a huge amount of debt that will be tough to overcome?
  7. How much room for user-base growth is there?
  8. Is there room for geographic expansion?
  9. Is there significant potential to grow the amount of revenue per user? Will the company’s user-base buy into that or permit that?
  10. Are there any governmental investigations that might hurt the company?
  11. Are there any major lawsuits against the company?
  12. Does, or will, the company have a dominant market position versus its rivals?
  13. Are there significant competitive threats from startups or other giant players entering their niche?
  14. Do you believe in the company’s management?
  15. Would you buy the company if you weren’t a user/customer and weren’t familiar with them?
  16. Would I only be buying this stock because I don’t want to miss out on it if it explodes? (this is what causes bubbles, my friends)
  17. Am I only buying because everyone else is buying it?
  18. Is it a good market right now for an IPO to succeed?

Oh, and when you’re done pondering those questions, don’t forget to like the 20somethingfinance Facebook page.

Facebook Stock IPO Discussion:

  • Would you buy the Facebook IPO? Why or why not?
  • Do you think Facebook will continue its rapid growth?
  • How do you see Facebook growing revenue?
  • How do you think Facebook’s stock will perform?

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About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 7,500+ others by getting FREE email updates. You can also explore every post I have written, in order.

  • Jeff Walden says:

    While “failed to live up to their hype” is certainly true, I think “hype” generally connotes an excess of publicity. So Groupon, LinkedIn, and Pandora not living up to it is hardly surprising, and I’d say that phrasing is somewhat unfairly derogatory to the value of those businesses. (Which is not to say I think those companies’ fundamentals are or are not sound; I haven’t given any of them the slightest thought, as I’m a total-market buy-and-hold-for-the-long-run sort of person.)

    Generally, I’d say the right way to view IPOs is that their initial valuations are always somewhat inflated by irrational investors overbuying them. Unless you’re independently wealthy with money to spare, you shouldn’t be participating in IPOs by buying those stocks. Wait for the headiness to wear off awhile and the IPO headlines to subside, and only then get in (if indeed the getting is good).

  • BG says:

    Not buying facebook. I dont use facebook. I don’t know a single person who has given facebook a single penny via a sale.

    Their business model is to sell all of the information you post on their website (and the web tracking stats on you) to other corps.

    This is why I block all outbound traffic to facebook servers at the OS layer.

  • Max says:

    Yeah G.E., great article… Glad you made that list of questions! I’m all about doing the research now to answer these types of issues and others related to Facebook’s IPO. Sure it might be a legacy, generational stock (like Apple or MasterCard), but THAT $100B implied valuation is pretty wild… I have written recently about how I think Facebook should immediately buy Netflix (NFLX) — pay in stock, and they will actually deserve that premium valuation. Everybody wins!! (Except Microsoft?) What do you think? Couldn’t they LEAP forward with a bold move like that?


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