Facebook IPO: opportunity or “muppet bait”?

Remember the trader who told the BBC that “Goldman Sachs rules the world”? He’s our new columnist

Our new columnist Alessio Rastani is the self-proclaimed trader who shocked the world by declaring live on BBC News that he goes to bed “every night dreaming of the next recession” and that “Goldman Sachs, not the governments, rule the world”. He’s a controversial figure, not least because he’s a self-taught non-institutional trader with no FSA license. But he certainly isn’t shy about sharing his views. Do you agree with his words? (His words are his own, and in no way endorsed by LondonlovesBusiness.com)

OK let me come out and say it.

I am not buying Facebook stock when it launches this Friday. I will not touch it – not even with my mother-in-law’s money.

Not until the dust settles anyway…

I can already hear people screaming at me: “Oh but you’re going to miss out on the opportunity of a lifetime as the stock will skyrocket to the moon when it launches.”

Well. There is your problem right there.

Jim Rogers, the legendary millionaire gold investor, once said: “Normally when everyone is thinking the same way, you should at least start thinking: ‘Hey, wait a minute! It cannot be right if everyone is thinking the same way! Somebody is not thinking’.”

Just about everybody, from school kids, college students and sweet old grannies are excited about getting their hands on this stock.

The hype – no, mania – surrounding the launch of Facebook Inc this week is enough to make me extremely cautious about buying it as a long term investment.

“Muppet bait”

Let’s examine the facts.

When Facebook goes public on Friday, it is expected the company will price its shares at a range of $34 to $38 per share, with a market value of over $100bn.

However, here is some worrying news for anyone thinking they are going to make a killing from buying Facebook IPO expecting a similar result to Google’s IPO.

According to the Wall Street Journal, early investors in Facebook such as Goldman Sachs are already considering selling up to 50% of their holdings in the stock.

OK, let’s back up for a moment…

Goldman Sachs is ready to sell up to FIFTY per cent of their holdings in Facebook – and the stock hasn’t even launched yet…?

These Wall Street guys know what they are doing – and I wouldn’t want to be on the other side of them, would you?

My suspicion is that most of the demand that is coming for Facebook IPO is not institutional demand, but retail.

In 2004, when Google went public, most of the demand behind its IPO was institutional.

When you actually think about it, it begins to make sense.

Wall Street, having already made its money, can’t wait to dump half its Facebook inventory on to the hype-driven and uninformed public wrapped in yet another bubble.

In short, Facebook IPO is most probably, as Business Insider CEO Henry Blodget recently labelled it, “muppet bait”.

Not another Google

In my opinion, there are other good reasons why Facebook’s IPO cannot be compared as another Google.

Firstly, let’s not forget that at the time of its launch in 2004, Google was seriously undervalued.

It was coming at the back end of the dot-com technology crash which had left a bitter taste in many investors looking to load up on yet another tech stock.

And secondly, Google did not have nearly half the “cult status” surrounding it as Facebook does.

Facebook “funny analysis”

I don’t find arguments about Facebook’s shiny fundamentals (earnings, balance sheets etc.) persuasive either.

There is no doubt that Facebook as an entity has a unique position in the market place with very little competition.

But I think that in the real world of the stock market, fundamental analysis – or “funny analysis” – count for squat.

It does not matter how amazing Facebook’s actual or expected earnings are. The market is made up of people – and people determine prices.

Therefore, I always think that it is not what a stock is actually worth – but what people (or market participants) believe it is worth.

So even if a stock like Facebook may have great fundamentals – its stock may not be good to purchase. As we may well find in coming months, the stock may already be “over-priced” depending on the expectations of market participants.

IPOs – just too risky?

Another reason why I am shunning the Facebook IPO is because on the whole, I find IPOs just too plain risky.

Little information is known about how the stock will perform on the stock exchange and there is no price history.

When a stock goes public, its first few weeks, not to mention its first day, tend to be very volatile and unpredictable.

Let’s take Groupon (GRPN) as an example. From the time of its stock launch in November 2011 it has taken a beating from $28 to its current price just above $13. That’s a 53% drop in seven months!

On the other hand, LinkedIn (LNKD) is currently 38% higher than its initial price when it launched in May of last year.

But that is forgetting that LinkedIn dropped by 27% in its first 30 days.

Don’t chase it – let it chase you!

Obviously I understand that it is perhaps unfair to compare Facebook to Groupon and LinkedIn, or indeed any other stock.

But my point is very clear.

I will not be chasing any IPOs – whether it’s Facebook or something else – in their first few weeks.

Is it worth waiting until the dust settles?

Absolutely.

As Warren Buffett once said, “The price you buy at will determine your rate of return.”

You could have bought LNKD for $82 on the day of its launch. But had you waited a month, you could have bought it even cheaper at near its lows of $60. That would have given you a return of 88% instead of 38%.

Even with Google’s IPO you could have bought its stock almost two weeks later for exactly the same price it initially launched at.

So let’s say Facebook (FB) launches at $34 and “skyrockets” to $50 on its first day.

So – what?

Once the honeymoon period is over, then we’ll see a clearer picture of how the market really values this stock.

Conclusion on Facebook’s IPO

Fortunately, I don’t consider myself to be a reckless gambler and I have always found that caution pays off in the end.

It is also worth remembering the “greater fool theory”: For every fool out there who thinks he is buying for a cheap price, he believes there will be another fool out there who will pay a higher price for it.

Alessio Rastani gained fame and caused controversy last year by stating live on BBC news that he “dreams of another recession” and that “Goldman Sachs, not governments, rule the world”. The YouTube clip has since been watched over two million times, and Alessio has subsequently been interviewed by figures such as Sir David Frost. His website is LeadingTrader.com.