Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

The Facebook IPO: Google All Over Again, and a New Tech Bull Market?

By

Facebook is going public, and comparisons to Google's 2004 IPO are inevitable. However, market conditions are drastically different.

PrintPRINT
In all likelihood, social-networking giant Facebook is going to file for an initial public offering in the very near future, as soon as Wednesday, if Wall Street Journal reports are to be believed.

Now we've all been hearing rumors and reading reports about a Facebook IPO for the longest time, so normally, I wouldn't get excited about this "news."

However, last week, trading of private Facebook shares on secondary markets was frozen. And at the 2012 World Economic Forum Annual Meeting in Davos, Switzerland, Facebook Chief Operating Officer Sheryl Sandberg commented directly on the idea of going public by saying, "If this is seen as an opportunity for jobs and for people to use their work to change the world, that's what we want to be a part of."

The language in this psuedo-sales pitch is reminiscent of Google's (GOOG) "Don't Be Evil" mantra, which it incidentally referenced in its 2004 Founders' IPO Letter:

Don't be evil. We believe strongly that in the long term, we will be better served -- as shareholders and in all other ways -- by a company that does good things for the world even if we forgo some short-term gains. This is an important aspect of our culture and is broadly shared within the company.

The Google IPO defined the last bull market, at least in technology. It was a mega-deal from the most important tech company of the day, and it's made people a lot of money.

Google went public at $85 per share on August 19, 2004, and the stock is now up 582% versus a 59% gain for the NASDAQ (^IXIC).

A lot of people credit the Google IPO with putting the sizzle back in technology investing after the dot-com bust blew a major hole in investor confidence.

There's hope that Facebook could do the same today, given the high number of tech stocks trading at über-cheap valuations.

The poster boy of this crew is Apple (AAPL), which is trading at about 11 times forward earnings despite its sky-high revenue and earnings growth, and unparalleled level of innovation. (See Apple Earnings: Outstanding Achievement in the Field of Excellence.)

However, I'm going to have to play Negative Nancy and throw water on the idea of a Facebook IPO kicking off a new tech bull market.

Let's remember, we are in a drastically different environment than in 2004.

When Google filed for its IPO on April 30, 2004, the NASDAQ closed at 1,920.15. This was 679 days after, and 73% above, the October 10, 2002, low in the NASDAQ, which represented the worst of times after the dot-com bubble exploded.

Today, we stand 1,058 days and 122% from the March 9, 2009, low in the NASDAQ, which was the absolute low point following the destruction of the housing market.

So needless to say, in 2004, when Google filed to go public, it was a lot closer to a major bottom than we are today.

In addition, at that time, we were in a major bubble-building phase, which was a boon to the recovery in earnings.

Today? Well, we're worried that major European countries are about to sink into the Mediterranean Sea, and the word of the day is "austerity."

Furthermore, remember that we haven't yet seen a Facebook offering document just yet. As it turns out, investors have gotten pretty dang aggressive in tearing apart the financials of new companies.

Groupon (GRPN) was a consumer darling, but after a look at the numbers investors quickly determined that its growth and profitability were more than lacking. (See Groupon Is Technically Insolvent.) After trading as high as $31.14 on its opening day, it fell as low as $14.85 within a month, before rising back to the $20 level.

We saw the same dynamic play out with the social-gaming company Zynga (ZNGA). Investors, spooked about its high dependence upon Facebook and its slowing revenue growth, panned the deal, and it actually declined on its trading day.

So don't think the Facebook IPO itself is some guaranteed moneymaker. Investors may look at the numbers and balk at a $100 billion valuation. It's not impossible. (See Why a Facebook IPO Could Flop.)

This isn't to say the IPO market is dead -- the Michael Kors (KORS) IPO has been nothing less than a smashing success, but that company's fundamentals and prospects are a heck of a lot more impressive than Groupon's and Zynga's. (See Michael Kors: 5 Things You Need to Know.)

The increasing fickleness of investors, which is probably a function of both information overload from the financial media and the foul-as-all-get-out social mood, will probably keep even a spectacularly successful Facebook IPO from boosting the broader markets.

That said, I'm eyeballing Facebook as a major momentum play based upon crowd reaction to the offering document.

I think absurd jubilation following the first look at the numbers could build up a mini-bubble, regardless of the valuation. I think Facebook, by virtue of its brand name, has the potential to bring frustrated retail investors into the market to bid up the stock. My crystal balls is detecting a potential situation where Facebook gets knocked for its valuation, but it just keeps going up simply because people can't help but dial 1-800-GET-ME-IN.

But for now, let's wait and see.

Twitter: @MichaelComeau

< Previous
  • 1
Next >
Position in AAPL
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE