Friday, May 18, 2012

The Facebook IPO is Today

Facebook is going public. That means that you can own part of Facebook. Pretty cool huh? Well, it's not all good. In any start up company venture capital and angel investors (both are groups of rich people) only invest when they feel that the company will go up greatly in value and have an exit strategy. Going public through an IPO means the largest investors in the company are typically selling some of their shares in the company to get more money. In other words, the most informed investors about a particular company are selling their stock.

That is not strictly true for Facebook. When a company has over 500 shareholders they have to release their financials because the SEC mandates it. Facebook passed that threshold and since they will have to publish their financials anyway, they might as well make $18 billion off of it through an IPO.

Finally, as a value investor one of the metrics I look at is Price to Earning Ratio. That is the price that you pay compared to the profits of the company on a yearly basis. P/E below 5 is typically a great value. P/E below 10 is still a bargain. A P/E of about 12 is the 300 year average valuation of the largest companies. Facebook's P/E will be over 100 today. It could go up to 150 or even 200 today. That's not ridiculous, if you feel that Facebook will make ten or twenty times as much money in the coming years than it does now. However, Facebook is already not what it used to be. It is trying to be a one stop entertainment (and recently, shopping) stop. It was cool because it connected people. At the beginning it was even more cool because you had to have a .edu email address. Now anyone can get in, they reduce their privacy policy every eight months or so, they are trying to sell stuff, and they are getting into the games arena. It's just not what it used to be.

That being said, I'm still thinking about buying some. I do hope that Twitter doesn't follow in Facebook's steps. Twitter is cool because it is simple. It is actually my prefered social media at the moment.

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