Facebook's IPO Means What For You?

Facebook's IPO success depends on Mark Zuckerberg's skill, will for selling ads.

May 16, 2012, 1:33 PM

May 16, 2012 -- At the same time the price and public clamor for Facebook's blockbuster IPO is rising, experts' expectations for the company's performance are in decline.

The company on Tuesday raised the asking price of its offering – expected on Friday -- from a range of $28-$35 to $34-$38.

Yet at the same time, General Motors announced it will stop buying ads on the social network after a $10 million campaign. A GM spokesman quoted by the Wall Street Journal said GM remained "committed to an aggressive content strategy" with the company, and that Facebook remained "a very effective tool for engaging with our customers." As for GM's spending one more dime on advertising, however: nertz. Facebook's ads, it said, did not sell cars.

In a survey of 124 portfolio managers and buy-side analysts conducted by Rivel Research Group, only 8 percent said they expect to see Facebook trading above its offering price six months after the IPO. Thirty-one percent said they expect the offering to have no impact whatsoever on the overall market for IPOs.

Yet excitement among ordinary investors for the IPO continues to run high, given that past IPOs have made some investors rich. An analysis by ABC News shows, for example, that a share of Johnson & Johnson bought at the IPO price of $375 would be worth $10 million today. A share of Apple bought at the 1980 IPO price of $22 would be worth about $44,800 now.

The fact that Facebook's stock has been virtually impossible for little guys to buy in advance of Friday's offering may only have heightened the shares' appeal, on the principle that what people want most are things they cannot have.

Jay Ritter, an expert on the history of IPOs and a professor of finance at the University of Florida, says Facebook's offering is indeed historic. "This is more than just another IPO," he says. "It's the largest ever for an Internet company, and among the largest for any in U.S. company in history." It's unprecedented, he says, for a company just eight years old to receive a market cap of $100 billion.

Ritter says other recent IPOs have raised comparable amounts, including Visa's IPO and GM's in 2010. Both companies had name recognition: "Everybody knows G.M. Lots of people have a Visa card." Yet neither offering generated anywhere near the excitement as Facebook's.

Of course, neither company had a chief executive of Mark Zuckerberg's star power or youth appeal. And, says Ritter, neither had Facebook's "blistering" growth rate. "People confuse rapid growth with a good investment," he says.

Now the $100 billion question is, can Facebook maintain that growth by better monetizing its 900-million-plus users?

Larry Kim, founder of WordStream, a Boston a provider of search engine marketing services, isn't optimistic.

"We're not financial experts," he demurs. "We're experts on online advertising." WordStream's analysis of the comparative effectiveness of Facebook's and Google's display ads, however, concludes that Google has by far the better product. Whereas Google has a wide variety of formats to offer advertisers--including video and ones customized for mobile devices—Facebook, says Kim, has only two.

Google, he says, does a better job targeting ads on the basis of recent customer purchases: An advertiser selling auto accessories, say, would want to target somebody who's just bought a car. Google can do that. Facebook can't, Kim says. "Facebook delivers crappy messages to the wrong people at the wrong time." Advertisers using Facebook, in his opinion, are "wasting money."

For Facebook to improve its advertising product, says Kim, would take years of effort. He questions whether Zuckerberg has the desire or the will to do that. "They talk about ads as if they were a necessary evil," says Kim of Facebook. "Zuckerberg's letter to shareholders was 2,500 words long. It mentioned advertising exactly once."

Would Kim buy the stock? "I'd certainly be interested—but with the caveat that it would have to be one of my longest-term holdings. You'd have to be willing to wait." The reason, he says, has to do with the amount of time and effort Facebook would have to spend for it to approach Google's revenues. Google has ten times Facebook's $4 billion in sales. "If they're going to get the extra revenue from ads, they've got lots of catching up to do."

As for Ritter, would he buy the stock? And if so, at what price? "My personal decision would be about $40 a share," he says. "It will very likely go up the first day. But if it gets over $40, the upside potential is so limited I would not want to buy."

How much turbulence does he expect Facebook's IPO to create in the stock market overall? Isn't making a $100 billion offer tantamount to throwing a piano into a swimming pool? No, he says. "I don't think it's going to have a big impact." The total market cap for U.S. stocks, he says, is $16 trillion. Facebook's IPO "represents less than one tenth of 1 percent of the total market cap. $100 billion gets traded on a typical day."

Might excitement over the IPO divert investors' attention, in a way that might create opportunities for hanky-panky-- in the same way that crooks, when they want to rob a bank, wait for a diversion? Again, probably not, says the professor. But he agrees that the hoopla over Facebook may cost the American economy in another way.

"In Europe," he explains, "when there's a World Cup soccer match, a lot of employees watch it when they should be working." There have been studies, he says, showing that when someone's team is winning, their productivity suffers. "Some people in the financial community," Ritter predicts, "will be watching their screens Friday to follow Facebook. But I hope the vast majority of American workers will be paying attention to their day jobs—including me."

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