The Social Media IPO Gamble - To Buy or Not to Buy?
Recently, social media giant Facebook announced it will become a publicly traded company, with an initial public offering (IPO) slated for later this year. With over 845 million users in all corners of the world, Facebook has penetrated the market and established itself like no other social media site before it, quickly becoming the social media site of choice across all demographics.
Sure, Facebook has changed how we use the internet and how we communicate with each other, but will Facebook be a good investment?
If you’re thinking of investing your money in social media companies, here are a few things to keep in mind before putting all your chips in:
1. Social media IPOs, like social media itself, moves at a rapid speed - If we look to prior social media site IPOs, trends show that while these stocks nearly all have an initial “pop” upon release, and most have had difficulty building upon that first day trading momentum. Thomson Reuters reports trends in 12 recent social media companies that have gone public in the last year, and as of March 13, 2012:
- Six are trading BELOW their IPO price
- Nine are trading below the first trading day’s closing price, meaning that if you weren’t able to get in on the IPO and bought the stock in the secondary market the day shares started trading, then nine out of 12 times, you are probably losing money if you still hold the stock today
- Five out of 12 social media companies that have offered an IPO are yet to turn a profit
- Shares of Groupon, which was the most celebrated Social Media company to have gone public, are currently trading ~16% below their offering price as they have struggled to communicate the benefits of their business model
%Chg First Day Close v. IPO
%Change First Week Close v. IPO
%Change as of 3/13/12 Close v. IPO
%Change as of 3/13/12 v. First Day Close
Source: Thomson Reuters
2. Not all social media sites are created equally – As everybody knows, Facebook is the 800-pound gorilla of the social media world, and as such, this will have a major impact on its valuation and market capitalization. Similarly, LinkedIn, which has been described as Facebook for business, has been able to hold onto gains since its IPO on May 19, 2011 and currently trades at roughly $94 as of March 13, 2012, a 109.6% increase over its IPO price of $45. While Facebook and LinkedIn are seen as social media sites with continued growth potential, many others are not, and have yet to prove their value.
3. Being “connected” has its benefits – Just like your friends on Facebook who turn you on to a special at a local restaurant or share a social media promotional deal at a local business, success in social media IPOs also requires a connection to an opportunity to purchase stock at the initial offering price. Usually, the initial offering price is secured by institutional investors and large investment bank clients, and often, by the time the general public goes to purchase shares, the price has increased significantly.
4. Is it a “real” business or just the latest buzz? – Social media stocks will likely experience a path similar to the dot.com stocks of 15 years ago – websites with a “real business” are likely to succeed over time, but social media companies with flawed business plans, or worse yet, no real business plan at all, are just as likely to lose money over time. The upcoming Facebook IPO has been compared to Google’s IPO in 2004, as Facebook has Google-like dominance in their particular niche of the social media world. While other social media sites bill themselves as “The Facebook of (fill in the blank)”, it’s important to remember that there is still only one Facebook, and most other unproven social media stocks may ultimately make for a bad investment.
5. Don’t put all your eggs in one basket – As tempting as it may be to invest all of your money in a social media IPO looking for the “home run,” wise investment strategy tells you to never invest all of your money in one company or industry. While short term gains can be made, if the stock value plateaus, or worse, plummets, you’ll stand to lose everything. Diversify your investments, and work with your investment advisor to keep track of your portfolio’s performance over long-term periods to monitor steady growth.
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