I remember the day like it was yesterday. Investors were calling in left and right wanting to know what they could do to get their hands on the much-discussed Facebook stock (FB). The Facebook IPO had been hyped for weeks and it seemed like whatever channel you were on, the talking heads were all abuzz about the upcoming IPO date.
What this did, on one level, was bring many retail investors out of the woodwork hoping that they could get their hands on the hot stock. Many thought that if they could indeed get their hands on some of the shares as they started trading, then they would be able to turn that into some big returns for their investment portfolios. Sadly, the issues that the Facebook stock encountered as it was trying to get out of the IPO gates was only the beginning of the troubles it would face over its first year and highlighted the problems behind investing in hype as opposed to substance.
Investing in Hype Can Be a Fool’s Errand
One of the biggest problems I saw behind the Facebook stock was that a lot of it seemed to be based purely off of hype. Investors were seeing the hundreds of millions in Facebook’s subscriber base and thinking that it would translate into dollar signs. I can understand how many can see numbers like that and think: that the stock is going to rocket launch once out of the IPO gates, but that was not the case.
The sad truth is that much of that really means nothing, and that you need to look at things below the surface to determine whether or not a stock truly is worth investing your hard earned money in. Following this hype created somewhat of a herd mentality that was driving many investors to invest their money in Facebook stock without really giving much thought to it. Mistakes can be costly, and we all have made them, but making the mistake of following the hype behind a stock, especially at IPO pricing day, can be one that has the potential of reaping solid losses.
IPOs Are not for the Weak of Heart
IPOs, or Initial Public Offerings, occur when a company first starts trading on the stock market. The company may have been around for a number of years, but is just now starting to trade publicly. During the weeks and months leading up to the IPO, officials will travel the country in roadshows as an attempt to drum up excitement over the upcoming stock debut, which will hopefully will ramp up demand. That increased demand will hopefully result in a higher IPO price the day it starts trading.
While investing in the stock market can be considered risky to some, investing in IPOs is a different risk altogether. There might be unknowns, or speculation that the company may not be as good as the rose colored glasses the officials claim it to be. An example of this was what we saw with Groupon (GRPN) several years ago. In in the days leading up to their IPO, there were serious concerns about their accounting practices and that impacted the stock as it came out of the gates. It did moderately well initially and then, very quickly, it started to decline and today is a shadow of its former price.
We also saw this, to a certain extent, with the Facebook stock when we saw advertisers like General Motors pull out of advertising with Facebook because of the concerns they had. In light of all of this risk related to IPOs, many brokerages will have conditions that must be met in order to invest in them. They can only be bought in 100 share blocks and most brokerages will have certain account balance requirements in order to participate in an IPO. There are a few that start at as little as $25,000 to $50,000 in account balances while many require account balances of at least $100,000 in addition to other requirements that must be met.
This is not to say that smaller investors are barred from investing in IPOs, but there is an inherent risk associated with them which generally must be mitigated with a larger account balance and knowledge. All this said, not all IPOs are bad. If you bought shares of Coke (KO), Disney (DIS) or LinkedIn (LNKD), you would be sitting pretty right now. However, for each of those, you have many more like Facebook (FB) or Groupon (GRPN) that didn’t fare so well.
Where is Facebook Stock Going From Here?
It is hard to say where Facebook stock is going from here. Sure, it could have the potential of being a good investment play at some point, but right now I just don't see it. Facebook stock hit an opening day high of $45 and today is hovering around $25 per share. Those that bought shares at IPO and are still holding their shares have lost a significant portion of the investment, and I feel for them as they were likely fooled by the hype.
The long term prospects for Facebook stock still are playing out as we speak. They have been spending billions of dollars on initiatives like Facebook Home and Graph Search to see them not really amount to much in the near term. Facebook leaders are also facing headwinds in regards to how to monetize their mobile platform, and how exactly they need to go about optimizing that. In all of this, we can learn a lesson that investing in stocks with little research done has the potential to be dangerous to your portfolio as a whole.
Investing in the stock market requires that we understand what we are investing in and having a modest level of confidence that we are making the right move. We can never know for certain, to be sure, but we do know that following the hype can be dangerous.
What are your thoughts on Facebook stock? Do you think that it will ever return to its IPO price, or is it a stock you would avoid?