It's hard to imagine an initial public offering (IPO) as heralded as Facebook's. Even Microsoft's 1986 debut (at $21) didn't garner this much attention. It's rare when a product or service that's so ubiquitous and so central to people's day-to-day lives, becomes available for the public to purchase a position in. Imagine if our Cro-Magnon ancestors had found a way to securitize fire or the wheel.

How Much?
Liberal estimates set Facebook's upcoming book value in the exospheric 12-digit range. One fun side effect to a well-publicized IPO is that it gives prognosticators who have no skin in the game of chance to make unrealistic estimates about the company's market value. $100 billion? Sure, why not? Sounds more memorable than $7 billion or $11.9 billion. Neither of which would make a memorable headline, be easily rattled off by journalists or make a good follow-up story a few months later, when Facebook's book value peaks without ever approaching $100 billion.

Prices are opinions, we know that, and they often have little correlation to value. No less an authority than Adam Smith himself pointed this out, observing that diamonds are expensive yet have little intrinsic value, while water is vital and essentially free. So what of Facebook, which is little more than a glorified contact list interspersed with baby pictures and Zynga games?

There are 845 million people that spend time on Facebook, or at the very least, have accounts. So, does that mean each one is worth around $118, and if so, to whom? Or is this a case of unnecessarily dividing one number by another? Even if the average Facebook user posts every conceivable detail about their life, could an ambitious marketer or advertiser get $118 of added value out of that? These aren't rhetorical questions, these are questions a conscientious investor needs to ask before going long with an overpublicized company, whose business model is easily replicable; and if you don't think Facebook can be replicated, ask the good folks at MySpace or Friendster.

Facebook's revenue stream is based solely on advertising; facebook doesn't sell anything directly. It's a lucrative advertising vehicle, to be sure, with over $3 billion in advertising revenue last year.

By far the biggest American IPO in history was that of VISA in 2008. Not that longevity is a necessary condition for success in the marketplace, but VISA was a decades-old concern with millions of paying subscribers, both on the cardholder and merchant sides, before going public. VISA's IPO was valued at $17.9 billion and four years later the company's book value sits at about a healthy $78 billion.

The next largest IPO in history (among those companies that still exist in the same form, thus excluding AT&T Wireless and General Motors) was that of Kraft Foods in 2001 at $8.7 billion. Again, a company that produces a tangible asset and with significant barriers to entry. Facebook has announced that it hopes to raise approximately $10 billion when it first trades publicly, a bold statement that any investor should take under advisement.

This represents 99% of Facebook posts, from our unscientific observations:
"Here's a pic of my daughter in her princess Halloween costume!!!!!!"

And this represents 100% of the resulting social interaction (rounding to the nearest integer):
"OMG so cute!!!!!"
"Lindsey yor daughter is SOOOOOOO cute!!!!"
"SO cute lol"
"I made my daughter a similar costume last year! So cute!"

Meanwhile, one of America's most profitable companies, ExxonMobil, got that way by refining and distributing a product that most people can't live without.

Around 1998, when the public at large started to use computers for reasons beyond storing recipes, AOL represented most people's first exposure to online access. Back then, receiving email (or having any contact whatsoever with someone else without having to resort to telephone or face-to-face contact) was excitement writ large. The comparison with Facebook isn't a perfect one, but public mania helped AOL grow so quickly and so large that it bought and rebranded communications leviathan Time Warner. Within two years, AOL had surrendered $200 billion in market value and suffered some of the biggest losses in the history of commerce.

AOL developed something called the "walled garden," inaccessible to general Internet users. Once AOL's subscribers realized there was an unrestricted world beyond its boundaries, those subscribers left in droves. Today, Facebook operates in a similar fashion, yet members continue to patronize the service.

Naive individual investors think that it's possible to buy Facebook stock the day it goes on sale, hold onto it for an undetermined period then cash out, but IPOs rarely work that way. The lead underwriters stand to profit first, then their clients, then institutional investors. By the time Joe Investor places his order, Facebook's share price will likely have risen. With the stock in hand, "timing the market" becomes exceedingly difficult with such a short window. Hold onto Facebook for several hours? A day? Or ride it as a potential blue chip investment, holding it for years? The intelligent investor has already answered these questions before deciding to buy the stock. Especially a stock that has never traded before.

The Bottom Line
Facebook is a fantastic time waster, perhaps the greatest ever devised. It easily beats out the previous record holders going back throughout history: it trumps television, talking on the phone, golf, chess, trying to teach cats to obey simple commands, and getting drunk combined. But as an investment, the risk of buying Facebook stock could prove to be greater than any conceivable reward.

Related Articles
  1. Professionals

    The Best Financial Modeling Courses for Investment Bankers

    Obtain information, both general and comparative, about the best available financial modeling courses for individuals pursuing a career in investment banking.
  2. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  3. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  4. Stock Analysis IPO: Is it a 'Buy' or Should You Pass?

    Demand for relationships is always high. Now you will have a way to directly invest in the relationship market. But is it priced fairly?
  5. Fundamental Analysis

    Investment Banks: Not a Good Bet Right Now?

    Investment banks might appear safe to investors at the moment, but they're probably more dangerous than advertised.
  6. Professionals

    Common Interview Questions for Investment Bankers

    Explore some of the most commonly asked questions in an interview for an investment banking position, along with suggestions for winning answers.
  7. Stock Analysis

    Toys 'R' Us Stock Doesn’t Exist: Here is Why

    Learn why investors cannot trade stock in toy retailer Toys 'R' Us. This privately traded company could be a hot IPO candidate for the future.
  8. Investing

    Deutsche Bank Undergoes a Significant Revamp

    The Deutsche Bank's reorganization is being called one of the biggest shake-ups at an investment bank in recent years.
  9. Stock Analysis

    Goldman Sachs Vs. Morgan Stanley: Comparing Business Models

    Take a closer look into the most noted rivalry on Wall Street between Morgan Stanley and Goldman Sachs, the last two standalone investment banks.
  10. Stock Analysis

    If You Had Invested in Qualcomm Right After Its IPO

    Find out about how much you would have if you had bought 100 shares of Qualcomm during its initial public offering and the amount you would receive in dividends.
  1. When did Facebook go public?

    Facebook, Inc. (NASDAQ: FB) went public with its initial public offering (IPO) on May 18, 2012. With a peak market capitalization ... Read Full Answer >>
  2. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  3. How does investment banking differ from commercial banking?

    Investment banking and commercial banking are two primary segments of the banking industry. Investment banks facilitate the ... Read Full Answer >>
  4. What kind of assets can be traded on a secondary market?

    Virtually all types of financial assets and investing instruments are traded on secondary markets, including stocks, bonds, ... Read Full Answer >>
  5. Why would a company decide to utilize H-shares over A-shares in its IPO?

    A company would decide to utilize H shares over A shares in its initial public offering (IPO) if that company believes it ... Read Full Answer >>
  6. How do I place a buy limit order if I want to buy a stock during an initial public ...

    During an initial public offering, or IPO, a trader may place a buy limit order by choosing "Buy" and "Limit" in the order ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center