Facebook IPO: Is It a Good Buy?


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Everyone is talking about the Facebook IPO today. What does it mean? How will it do? Well, for employees and early investors, it means they're going to be a lot wealthier in the next few days. For everyone else it's up in the air right now. Many people think that Facebook will go the way of MySpace and become an advertising wasteland. Zuckerberg has refuted this with his now famous quote to shareholders, “We don’t build services to make money; we make money to build better services.” Others think that it will be a good buy and are eager to get their hands on some shares when they become available. Which poses the most important question of all: Is Facebook a good buy?

If you go with popular opinion, right now, the answer is no. Most think that the stock and the company valuation is way overpriced. And there is the history of now infamous tech stocks that went public around the turn of the millenium. Probably the one to consider right now is the case of theglobe.com, which started high at $64 a share in 1998 before completely tanking just a year later. Then there is the elephant in the room: Myspace. Once beating Google as the most visited site in the U.S., the company saw a sharp rise in users until News Corp bought it for $580 million in 2005. Six years later it was sold to Specific Media for $35 million.

There are also plenty of current publicly traded stocks to compare it to. WebMD, Zynga and Groupon have all seen their stocks fall since their IPO. Some more than others. Groupon saw a big valuation of $700 million in 2010 which turned out to be way too high. Stocks have dropped to less than half their value in just a two year time frame.

The dubious staying power of so many tech stocks has left smaller investors doubtful about whether buying Facebook is a good idea. This informal poll from Yahoo explains the sentiment well.

Facebook poll

The key to Facebook's success will be its advertising platform. The big news here is that General Motors backed out of its $10 million ad deal with Facebook right before the IPO. Granted, this is a drop in the bucket when compared to Facebook's overall advertising revenue, but it does cast a shadow of doubt in investors minds. They have to ask themselves, If a major advertiser is seeing their money go to waste with Facebook's current advertising scheme, how does that bode for my company, which is no where near the size of GM?

Those that think the company will pay off point to the less tangible aspects of Facebook advertising. They do not see the same amount of direct clicks on ads that competitors like Google have, but they are better at building brand loyalty. These proponents think that having their company appear like a "friend" to the consumer is much better than the direct sales they are seeing from ad clicks.

Only time will tell if Facebook's record-breaking IPO turns out to be a record breaking flop. There are certainly plenty of investors lining up to get their hands on it. Ultimately, it will be up to Facebook itself. They are going to have to stay fresh and innovative, which has so far proved difficult for other once popular social media outlets.