I was talking with a neighbor this past week about Facebook and we were discussing whether it was time to buy its stock (or not)…since neither of us “got in” on the IPO—Initial Public Offering this past May. Here’s a refresher: Facebook (FB) IPO’d at $42/share and immediately shot up as high as $45/share. And here’s the reality: As of this writing, the stock is sitting at $21.92/share. If you don’t quite remember the euphoria building up to this IPO, you might have been locked up in a dark closet for the past year. The consensus amongst the general public was to buy, buy, buy!!!
For 2012, Facebook will most likely will remain in our memories with its historic and unforgettable IPO. For weeks, months, and in some cases years, investors (both seasoned and your average ‘Joe’) talked about how nice it would be to get in on the ground floor of this “sure thing.” And who wouldn’t want to own a share of a company that has nearly 1,000,000,000 user accounts, and commands nearly as much personal use time as television from its subscribers?
Basically, there are a few approaches to valuing a stock—one of which is called the Capital Asset Pricing Model (CAPM). In theory, the CAPM helps investors decide “at what price should I purchase a specific company’s stock.” The specific stock can be overpriced, underpriced, or at a fair value. Using this process of due diligence (along with several other fundamental and technical analytics), investors can use this information to then base their purchase decision—to buy, or not to buy.
However, Facebook had an additional factor that can’t really be priced into any formula…and that is the fact that virtually every non-investor man, woman, or child was ‘possibly’ ready, willing, and able to purchase this stock at any price—regardless of any fundamental, technical, or logical rationale. Secondly, the basic economic supply and demand model of stock pricing would dictate that this “emotional” factor would or could drive the stock price to astronomical levels.
Continuing the conversation with my neighbor about Facebook, I used basic math to make a point: “If Facebook could figure out a way to extract $1, $2, $5, or even $10 per year from each of its users, that would bring in 1, 2, 5, or $10 billion dollars of revenue respectively (one-billion users times the amount).” Or what if there was a monthly fee of $5 per person (and only half of the accounts were willing to pay), that would bring in $30 billion of revenue. And from that revenue, more products, services, or even dividends could entice investors to buy and hold its stock—potentially driving up the price further.
I guess the point I’m trying to make is that although many of my peers, clients, friends, and family who really wanted to “get in on the IPO” of Facebook and weren’t able to, have come out alright—this time. And here’s the nice ending to this story: If you still want to purchase the stock, it’s available at a substantial discount from the IPO—nearly half price!!!
This is not a recommendation to buy, sell, or hold Facebook stock. Individual securities prices are based on many factors and can lose all of their value. Investors should conduct their own research and due diligence prior to investing. This is not a solicitation or endorsement of Facebook stock.