Facebook IPO Properly Priced

This story was interesting.  After the first day of trading, Facebook’s IPO is trading near the IPO price of $38/share, closing around $38.25.

A fool says “Facebook’s shares didn’t spike on the first day of trading.  Therefore, the IPO was a failure.”

Actually, it means that the shares were correctly priced.

Suppose that Facebook sold $10B of equity at the IPO, and the share price doubled on the first day.  In effect, Facebook sold its shares for $10B less than they were really worth.  If that happened, $10B was stolen from the pre-IPO shareholders to the underwriters and people who bought the IPO.

Also, the underwriters get the “green shoe”, an option to buy more shares at the IPO price a few months later.  That call option is *VERY* lucrative.

Facebook is a successful business with lots of users.  However, it already has a $100B valuation.

I interviewed at a profitable web business, and asked “How much revenue do you make per user per year?”  They answered “$3-$5 per user per year”.  Assume that Facebook makes $5 per user per year.  Even if every person on the planet created a Facebook account, that’s only $15B revenue per year (assuming 5B potential users).  Also, ad sales in 3rd world countries aren’t worth as much as ad sales in the USA.  If you correct for that, Facebook’s “max revenue” makes it hard to justify a $100B valuation.

I never saw the attraction of Facebook.  I’d rather write on my personal website than Facebook.  I’d rather have people go to “realfreemaket.org”, than go to facebook.com/fsk.  It’s better to build a personal website/brand, than be just another page on Facebook.  Also, Facebook has a “real names” policy.  I would not be allowed to create an account with username “FSK”.

Facebook doesn’t have a lock on its users.  There is a risk that 5 years from now, someone else will come up with something better, and Facebook will lose its position.

$100B is a very high valuation for Facebook.  With lots of media hype surrounding the IPO, that makes it easier for insiders to cash out, selling to unsuspecting fools and retail investors.  If the pre-IPO shareholders are smart, they should cash out as much as they can.

I still say that gold is a better investment than the stock market.  I only know of one stock that did much better than gold over the last 10 years, Apple (AAPL).

Facebook’s shares did not pop on the first day of trading.  That doesn’t prove that the IPO was a failure.  When an IPO pops on the first day of trading, the pre-IPO shareholders got ripped off.  At a $100B market cap, that’s a high valuation.  Gold will almost definitely be a better investment than Facebook over the next 10 years.  The mainstream media hypes the Facebook IPO, because a lot of banksters and insiders are making money off Facebook.

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