Should You Invest in Facebook?

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Rumor is running rampant that Facebook is about to file for a public offering of stock. Should small investors give the IPO the thumbs up?

When it comes to an initial public offering (IPO) of the ubiquitous Facebook, there are plenty of investors ready to click the “Like” button.

Although the company isn’t talking, rumor has it Facebook may file a Form S-1 with the SEC as early as Wednesday, Feb. 1. That would be the first step in issuing shares to the public.

The actual stock offering would be weeks away, with shares probably starting to trade in May. If the company sells the expected 7 to 10 percent of the available stock and raises the expected $7 billion to $10 billion doing so, it will be the largest Internet IPO in history – and value the entire company between $70 and $100 billion, making it one of the most valuable in the United States.

By way of comparison, the market cap for McDonald’s is about $100 billion. Citigroup and Amazon are worth about $90 billion, and Bank of America about $75 billion.

If that happens, founder Mark Zuckerberg’s stake will probably give him a personal net worth north of $20 billion in time for his 28th birthday in May.

Should you buy?

As with any stock, that will depend on the price, and it’s far too early to hazard anything resembling an educated guess. Initial indications suggest the stock could be priced to value the company as low as $70 billion and as high as $110 billion. If it’s priced at the lower end, that would obviously be a much better deal than if it’s priced at the higher end.

Some pundits are saying buy early and ask questions later. In an article published yesterday, CNBC’s Jim Cramer said not to worry too much about the company being offered at a rich valuation…

“With 800 million users, a fantastic business model and tons of revenue, Facebook deserves to have a gigantic valuation,” Cramer said. “It’s growing really fast and making a ton of money. So don’t be thrown off the scent of what could be a real home run.”

There’s no doubt that Facebook is an extremely valuable company. But there’s no such thing as a bargain at any price. This offering is widely regarded as the deal of the year, and some are even calling it the deal of the century. With hype like that, odds are good the stock price will be inflated and shares will be hard to get. In this article on Forbes, one expert predicted that supply will be tight relative to demand, with demand for the stock outstripping supply by a factor of 4 to 1.

Translation? The stock will pop on its first day of trading, but unless you’re a heavyweight investor or know someone, it may be hard to get in on the IPO.

Over the long term, the value of Facebook, or any stock, depends on how much money the company’s making and, more important, is expected to make in the future.  Since Facebook is currently private, only the insiders and the IRS know for sure how much they’re making now. The S-1 will lay bare the company’s profits, which in 2011 were estimated to be from $500 million to $1 billion.

As for future profits, Facebook is certainly at the forefront of social networking and has the audience to grow its revenue substantially through multiple means.

The bottom line – deal or no deal?

If the rumors are true and Facebook files to go public this week, the information they provide will go a long way toward answering that question.  But we’re still months away from an IPO, and between now and then you’ll have the opportunity to see hundreds, if not thousands, of articles featuring every expert on Wall Street and the blogosphere weighing in.

But judging by the media hysteria just the rumor of the offering is creating, I can make two firm predictions.  One, the stock will be valued at more than it’s worth. And two, the average investor is unlikely to get a single share prior to its trading debut.

Stacy Johnson

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