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?

Followers
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.

Posts
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.

Failures
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. Investing Basics

    How An IPO Is Valued

    The process of determining a company’s initial share price includes quantitative and qualitative components.
  2. Budgeting

    5 Apps Every Investment Banker Should Have

    Learn more about how apps for various platforms benefit investment banking, and discover five apps all investment bankers should download.
  3. Fundamental Analysis

    Will Health Care Continue to Drive IPOs in 2016?

    Learn why health care IPOs may be slowing in 2016, and how Obamacare, poor previous filings and economic factors are affecting the health care sector.
  4. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  5. Investing Basics

    Inside IPO Roadshows

    Understand more about IPO road shows. Learn the reasons why an IPO road show is important for the success of a company's public offering.
  6. Stock Analysis

    If You Had Invested Right After Berkshire Hathaway's IPO (BRK.A)

    Learn how much you would now have if you had invested right after Berkshire Hathaway's IPO, and find out the classes of shares that you could invest in.
  7. Stock Analysis

    Is Now the Right Time to Buy Coty? (COTY)

    Find out whether fragrance and color cosmetics powerhouse Coty deserves a place in your portfolio. Will recent acquisitions help turn the company around?
  8. Economics

    Does Big Money Hurt or Help Clinton and Rubio?

    Marco Rubio and Hillary Clinton lead their parties in raising money from Wall Street. Is that a help or a hindrance?
  9. Economics

    Economist Guide: 3 Lessons Adam Smith Teaches Us

    Learn three critical lessons about economics from 18th century philosopher Adam Smith, considered by many to be the father of economics.
  10. Stock Analysis

    Moderna Therapeutics: An IPO Candidate in 2016?

    Find out the reasons why 2016 may be the year when highly valued biotech company Moderna Therapeutic files for an initial public offering (IPO).
RELATED FAQS
  1. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  2. When did Facebook go public? (FB)

    Facebook, Inc. (NASDAQ: FB) went public with its initial public offering (IPO) on May 18, 2012. With a peak market capitalization ... Read Full Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
Hot Definitions
  1. Short Selling

    Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is ...
  2. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  3. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  4. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  5. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  6. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center