Think about this before buying the Facebook IPO

by Michael Tarsala

Facebook at its IPO is probably not a stock for most long-term investors to buy:

  • It’s not a core holding for retirees — some of whom are reported to be clamoring for it.
  • You don’t bet your kid’s entire college fund on it (or any one stock).
  • Given the 41 times forward PE, more than 3x the broad market’s valuation, it’s not for value investors.
  • As with any IPO, the short track record means it offers very little in terms of a research edge.
  • Keep in mind, it’s something you may eventually own a decent amount of in your large-cap fund, ETF or growth fund anyway.

Questions long-term investors should be asking include:

  • Does Facebook deserve twice the market value as Nike (NKE) and Goldman Sachs (GS)?
  • Is it instantly worth more than Amazon (AMZN) and its more than $50 bln in revenue?
  • And is it worth more than eBay (EBAY), Yahoo (YHOO) LinkedIn (LNKD) and Groupon (GRPN) combined?

That’s possible at the start. It could be worth far more on a market cap basis if there’s a big opening day pop.

Yet some experts are skeptical about the long-term.

Henry Blodget was vilified more than a decade ago for giving wildly aggressive tech stock prognostications. He’s now calling Facebook “muppet bait,” noting cash flow that has turned negative, and 45% revenue growth that is slowing down.

You have to applaud Mark Zuckerberg and Facebook for building such a unique and innovative company that started out of a dorm room. But you don’t have to run out and buy this stock. And especially not on the first day.