Why the Facebook IPO Isn’t Worth Buying

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Yesterday I received an email from my mom asking if she should buy Facebook stock.  She uses Facebook.  She uploads photos.  She “likes” everything (of course, she didn’t understand it when I told her that when she “liked” something she was then allowing Facebook to track her movements online).

How could it not be a great opportunity?

After all, the public trading debut on Friday was not only on one of the most recognized company names in history (everyone has heard of Facebook) but also the largest.

And that’s the kicker.

Yes, it’s exciting and interesting that Facebook is going public with a $100 billion dollar valuation, and that Mark Zuckerberg is worth $19 billion with the IPO price around $38.  He’s the world’s second youngest billionaire, which is enough to make any parent proud.

Great stuff.  An awesome American success story.  Who wouldn’t want to be a part of that?  And who knows, maybe Facebook will jump up to $500 or $600 like AAPL and GOOG, right?!

Well, guess what.  You aren’t a part of that excitement, and buying the stock on the open market doesn’t give you the opportunity to be a part of that.

Why not?

When Microsoft went public in 1986, their market cap was $785 million dollars, and Bill Gates stake was worth $350 million.

See anything wrong here?

Well, with Microsoft, there was the potential to grow into a big company.  This is why $10,000 invested in Microsoft at the IPO eventually became worth millions.  The company went from a market cap of $785 million to today’s valuation of $247 billion.  That’s a move of 314 times.  In other words, to be exact, $10,000 invested in Microsoft at its IPO is today worth $3,140,000.

With Facebook, it’s starting life as the biggest company ever to go public, with a market cap of $100 billion dollars . . . making it larger than half the companies listed on the Dow.

Let’s put it this way: for a $10,000 investment in Facebook to turn into $100,000 (let alone millions), Facebook would have to grow to a point where its market cap is bigger than the combined companies of AAPL (the world’s largest company by market cap), GOOG, MSFT and AMZN.

A trillion dollar market cap.  With a “T”.  Bigger than any company in the history of the world.

In other words, buying the Facebook IPO is a sucker’s game.

Don’t get me wrong – I’m very happy for Facebook and all of their investors, founders, and vested employees.  Their story is part of the American dream.

That said, the money has already been made by the people who were willing to take the risks from the beginning.  Board members, angel investors, venture capitalists, even family members will become millionaires and billionaires overnight.  Facebook’s IPO has been one of the most anticipated and talked about of its kind, all made possible by the early investors who made risky bets that the Facebook model would actually work.

And now, they get to use Wall Street to spew forth their incredibly richly valued shares on a public that has an appetite for excitement…for drama…and for possibility.

Want drama?  Watch HBO’s Game of Thrones.

Want to grow your capital?

Then hang onto your wallet and sit out this “amazing” opportunity.

Successful investing,

John Frederick Carter

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