Are you seriously thinking of buying Facebook shares?

By Felix Salmon
May 15, 2012

I’m well aware that I live in something of a bubble, here in Manhattan: the people I hang out with tend to be college-educated white liberals, and I’m racking my brain trying to think of someone I spend any real time with who might object to gay marriage. So clearly I don’t live in anything approaching a representative sample of Americans. But still, I’m confused by the endless parade of stories about people who want to buy Facebook shares, and whether it’s a good idea to buy Facebook shares, and how to buy Facebook shares, and so on and so forth. A classic example, running at 2,300 words, is in the WSJ today:

Late Monday, the social network raised the price range for its IPO to $34 to $38 a share…

Those numbers have created high hopes for both individual and professional investors. The excitement has drawn in fledgling stock buyers such as 11-year-old Jade Supple of Rockville Centre, N.Y., whose father plans to bet money saved to put his daughter through college on Facebook shares, although he has doubts about the price.

My gut feeling, here, is that what we’re seeing is nine parts lazy editors commissioning these pieces on autopilot, to one part a real-world phenomenon of huge retail demand for Facebook stock. The press loves IPOs, because they’re one of the few occasions when the stock market delivers a significant news event which can be prepared for in advance. But the public? The whole investing-in-IPOs thing just feels so late-90s to me, and the performance of stocks like Groupon and Pandora is hardly likely to spark another feeding frenzy.

So when Henry Blodget describes the Facebook IPO as muppet bait, I do wonder who the muppets really are. Is it a genuine horde of individual investors, all clamoring to get in on the hot new stock offering of the decade? Or is it the muppets on CNBC, following Mark Zuckerberg’s every move like he’s the Pied Piper of Hamelin, only with a hoodie instead of a magic pipe?

Still, I might be wrong on this. So here’s a quick, unscientific poll. Or, just have at it in the comments.

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Comments
16 comments so far

Felix –
considering that Barrons’ feature story this week was about the difficulty of having sex on memory foam mattresses, nothing these rags publish anymore should surprise you.

By the way – one of my neighbors objects not only to gay marriage, but to “homosexuality” in general. Why, I asked him. “Because the bible says it’s an abomination”

Posted by KidDynamite | Report as abusive

I’m not sure why you think your readers are any more representative of the country than your social circle…

Posted by right | Report as abusive

Um … No. And the part about hot IPOs being boring, passé, 90′s stuff – cool. But this one has this one interesting angle that I’m curious to see play out.

Friend Severin gave up his US citizenship and is on the hook for cap gain tax based probably on a price close to the IPO price. If the stock rockets and stays there, his exit pays off – the gain above IPO price is tax-free. If the stock does a Groupon he’s lost both his citizenship and that part of the cap gain tax based on the inflated portion of the IPO price.

Either this guy reveals a good feel for the future of the stock, or he’s going to be shown to be a loser twice-over. Care to guess? IDK which – I’m kind of hoping ….

Posted by MrRFox | Report as abusive

@KidDynamite – but then you do live out in the sticks ;D

The press has always fueled itself on hysteria so this is obviously nothing new and I’m surprised that Felix doesn’t recognise that this is a self-fulfilling prophecy. By talking about the IPO so breathlessly, the media is doing its part to stoke the fire.

Posted by GregHao | Report as abusive

Felix, most of my friends work in tech startups in the LA area and are extremely excited about the Facebook IPO. Most of them are people who haven’t dabbled in stocks before.

Posted by SwatiSpears | Report as abusive

@SwatiSpears – Sadly, those are also the same people who won’t be getting any Pre-IPO allocation and would need to buy FB on the open market.

Posted by GregHao | Report as abusive

It’s ironic that Blodgett is calling Facebook “muppet bait”, because Blodgett 1.0 would have been the putting the bait on the hooks. Has he ever publicly acknowledged what a fraud he was, by publicly pushing stocks that he was knocking privately?

@right, Felix has lots of readers who would never be part of his social circle. They almost always resort to name calling and insults, but they still read this blog so they insult people and call them names.

If there wasn’t a facebook IPO, there would be a twitter one, and they would probably be even more over-priced. Or some other IPO, as America loves lotteries, even when the only winners are the ticket sellers.

Posted by KenG_CA | Report as abusive

Perhaps because I don’t live in a place where you can advertise on anything and where everything is advertised on, I don’t see Facebook as a good investment. But then, I couldn’t see why Google was valued at $5bn at its IPO either and just look at it now! So when it comes to social media and Web 2.0 stuff, I seem to be too rooted on firm ground to speculate on this one.

Anyway, as has been said, IPOs aren’t what they were in the 90s, profits are almost always scooped up in revaluations prior to the IPO (as seems to have happened here) after which they stay flat, or join the others which fall in value. A valuation of $100bn (the same as Google) does seem a bit steep considering Google has first mover advantage on the internet ad market.

If I were going to invest, I certainly wouldn’t bet the farm on it, but the sheer number of people who use it must count for something I suppose.

Posted by FifthDecade | Report as abusive

As someone who grew up in Rockville Centre and now lives in the South, I can say that RVC is in no way a representative slice of America. It is a first-ring, NYC suburb full of relatively well-off people, many of whom work in financial services, and many of whom wish the late 1990s boom would come back. That said, I agree that the hype about Facebook is silly and thee valuations puzzling. The strength of Facebook is the network, but everything else is not so hot.

Posted by SouthNorth | Report as abusive

Try discussing this issue with a 9 year old…

My son eloquently explained to me why it typically makes sense to buy something that is popular. As he put it, if a car is popular, then many people are convinced it is good.

Since your average investor is only slightly more sophisticated than a 9 year old, it is no surprise that they are jumping for Facebook shares. Definitely popular, and what more recommendation do you need?

Posted by TFF | Report as abusive

Given the hype a one-day punt with 5% of AUM might be worth it if you can get any allocation.

The fundamental valuation doesn’t stack up but since when has that mattered in Web2.0.

Price discovery >24 hours.

Caveat emptor!

Posted by TinyTim1 | Report as abusive

Expanding on the points made by TFF and TinyTim1, the fallacious chain of logic followed by too many retail investors (and superficial talking heads) is popular product/service necessarily equals good company/business model and good company/business model necessarily equals good stock. Plenty of late 1990′s dot-coms were in the first category, along with (in my opinion) Groupon and Twitter. Expanding beyond tech, look at the airline industry – ubiquitous service whose use has grown dramatically over the past couple generations, yet the industry as a whole struggles to be profitable. Facebook is a profitable company with a sound business model, but I can’t see how it’s a good stock at this valuation. As pointed out, though, there’s always the greater fool theory in the short term.

Posted by realist50 | Report as abusive

>> the sheer number of people who use it must count for something I suppose.

It only counts if it can be monetized. The only way Facebook can do that is if it can fully engage the power of social networks to influence purchases as groups; in other words, to create the kind of buzz across networks that result in trends of mass purchases. Think meme or flash mob for the commercial world – all of a sudden everyone in our network has the same new trinket.

Can Facebook enable those sorts of influences? I am doubtful, but I’m also a lousy prognosticator.

Posted by Curmudgeon | Report as abusive

Facebook is such a hot IPO that it’s likely to be overvalued. Buying the shares would most likely be a momentum trade, and I don’t do those.

I’d likely buy the shares. I think that Facebook is going to dominate its niche. It could be very, very profitable in the long term. But I’m not buying at the IPO price.

Posted by weiwentg | Report as abusive

I think you called this one right, Felix – following is the title of an article on CNN Money right now: “Seniors clamoring to invest in Facebook IPO”.

Posted by Curmudgeon | Report as abusive

Considering they’ve up their IPO price 50% since the initial announcement I doubt there is much more than a 24hr spike. The stock that comes to mind is Tim Hortons; in Canada it was huge news and everyone wanted a piece, the IPO re-upped a couple of times, the stock spiked 30% the first day, gave it all back the next few days, flat-lined for 3 yrs (literally had a 2% range over that time.) Until this year it never reached its first day highs – five years later!

Posted by CDN_Rebel | Report as abusive
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