Facebook: Past Tech IPOs Show There are No Guarantees
What Pets.com and other tech IPOs have taught us.
— -- Before you get too excited about Facebook's initial public offering on Friday, remember that technology IPOs aren't always a long-term investor's best friend.
Facebook plans to sell 337.4 million shares to the public on Friday, aiming to raise more than $12 billion. The buzz has crowded out most other IPOs this week. "The circus is coming to town," says John Fitzgibbons, founder of IPO Scoop.com.
Facebook is a big deal — not just in terms of its stock, but in terms of its reach and clout. The Menlo Park, Calif., company, founded in 2004, claims 901 million monthly active users worldwide.
IPOs typically underperform stocks with the same market value for three years after their debut, according to Jay Ritter, professor of finance at the University of Florida.
"But Facebook isn't your typical IPO," Ritter says. "It is the small companies that are most likely to be disappointments for investors." Companies with more than $100 million in annual revenue typically match the broad market's performance the following three years, not including the first day's run-up, Ritter says.
One definite point of excitement will be Facebook's first day of trading. First-day run-ups can be huge. Visa, one of the largest IPOs ever, priced its shares at $44. The stock finished its opening day at $56.50, a 28.4% gain, according to IPO Scoop.com. Splunk.com, a software company, soared 108.7% on its first day last month.
Unless you're a big institutional investor or an insider, however, you probably won't get to call in rich for work on Friday. Investment bankers, who are the people who take IPOs to market, typically dole out hot IPO shares to their best clients. Those clients are mutual funds, pension funds and hedge funds.
New technology stocks can be tricky, especially for long-term buy-and-hold investors. Remember Pets.com? An Internet favorite during the dot-com boom, Pets.com went bust, leaving investors with nothing but memories. And in what may be an ominous sign for the Facebook IPO, General Motors said Tuesday that it would drop advertising on Facebook.
"Companies that become dominant are focused and on one track," says Matt Griffin, portfolio manager of Dreyfus Technology Growth fund. "It's hard for them to make a left turn when the market does."
The IPO hype is no accident. "Bankers work for the company, not the investor," Griffin says. "Their goal is to raise as much money as possible."
"People get carried away by looking at the sizzle instead of the steak," says Fitzgibbons. "In the case of Facebook, that doesn't take much effort. It's an exciting new company with incredible growth. It's a cult."
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