Facebook's IPO Launches; Should You Buy Stock?

Facebook shares priced at $38 to big investors. Is it worth the risk for others?

May 18, 2012 — -- Facebook's initial public offering, the biggest IPO for a U.S. technology firm, has gotten the attention of everyone from high school students to Wall Street professionals, many of whom are likely among the 900 million monthly users of the social media site.

While Facebook announced on Thursday that its initial public offering of common stock would be priced at $38 a share, raising $16 billion and valuing the company at $104 billion, the shares available for purchase by the public will likely be priced higher. That's causing many analysts to caution individual investors not to rush into making any risky investments.

"Yes, it's the biggest investing storyline of the year, but I would tell the average investor: stay away from Facebook," Andrew Tonner, financial editor of The Motley Fool, said. "Sit on the sidelines. Having interest in the IPO doesn't necessarily mean you need to participate in it."

Some analysts say the long-term risks for the company are real. Facebook has admitted that it has yet to make significant revenue from mobile advertising and that there is little it can do to make a foray into China, whose government has blocked the country's estimated 500 million Internet users.

Out of four recent technology IPOs -- those of LinkedIn, Zynga, Pandora and Groupon -- only LinkedIn has recently traded above its IPO price. LinkedIn's IPO price last May was $45 a share. On Thursday, shares of LinkedIn closed down 7.5 percent to $105 a share.

Mellody Hobson, president of Ariel Investments, an investment firm in Chicago, said there was "no way" she was going to purchase Facebook shares as an individual investor on IPO day.

"First of all, the institutions have gotten there first. And we're getting their sloppy seconds," she told ABC News' Sharyn Alfonsi.

To satiate the growing investor appetite for shares of the social media company, on Wednesday Facebook increased the number of shares to be sold at the market debut by 25 percent.

The company is offering 421.2 million shares of common A-class stock, which includes 180 million new shares sold by the company and 241.2 million shares sold by existing shareholders, such as early investors in the company and Facebook's founders.

Facebook's lead underwriter, the investment bank Morgan Stanley, determined who got shares of the company before shares are sold to the larger public on Friday, said Jim Krapfel, IPO analyst with the Morningstar investment firm.

Morningstar has valued the company at $32 a share. But all of the 421 million shares were sold Thursday at the $38 offering price to those investors who met the minimum buy-in requirements.

Some of those "prestige clients" are large institutional investors who manage workers' 401(k) funds. But an individual with a $10 million brokerage account at Morgan Stanley could buy Facebook stock on Thursday for $38 a share. And those individuals can sell those shares today, when the price is expected to jump to $50.

"The higher your account size and the more business you do with the company, or if your track record indicates you purchased technology IPOs in the past, you're more likely to receive shares and are likely to get a higher allocation, but there's no guarantee," Krapfel said.

Stock analyst Max Wolff said, "The IPO allocation is an elite lottery system, where people who don't need to win are invited to play."

"The elite have a chance to deliberate and evaluate the assets, and then the general public comes in later for the feeding frenzy," said Wolff. If you chase these shares in the open market, that's likely an expensive proposition, says Wolff.

Morningstar has valued the company at $32 a share, though Krapfel anticipates Facebook shares will trade around $50 or higher.

The largest U.S. IPO of all time was that of Visa, which had a size of $17.9 billion at $44 a share in March 2008.

ABC News' Lauren Pearle contributed to this report.