Facebook – Everyone Hates It. Is It Time to Buy?

If Facebook “closes doors” tomorrow, my life won’t change one bit. I have an account there, but for some reason it has never become my social media of choice. Maybe I am missing something. It is hard to be active on more than two social networks and extract value of the process.

It doesn’t matter what I think or feel as an user here. There are hundreds of millions of people that use Facebook religiously. It is their social network and they use it on a daily basis. Facebook is here to stay. It is an amazing company. Making money out of its stock is a whole different topic.

The only positive element that $FB has going for it, is that all investors hate it. In less than a week, it has transformed from a Ferrari into a toxic waste in the minds of so many. This is what happens when expectations are high and they are not met. Nothing ruins the mood more than bad surprises

I am not here to talk about the merrits of Facebook’s business and its enormous potential. Time will tell if they find a way to monetize better their reach. Price action will tell when the market starts to care about it.

A few months ago, I wrote a post, explaining that most IPOs are terrbile investments, but under the right circumstances could be good short-term trading vehicles. I stand behind my words today.

Many IPO stocks outperformed in Q1, but this happened because the market was forgiving and accommodating. It was a bull market and capital was flowing into equities. Besides, the small float also helped a lot. A little demand went a long way and once IPOs were spotted as an outperforming group, momentum carried on and more and more money came and chased after them. So, bull markets and small float – recipe for quick trading earnings. Look what happened to those stocks when the market went into a correction. Most of them gave back all of the profits and then some. You have to understand the nature of the beast you are dealing with and make sure you don’t overstay your welcome.

There is so much potential supply that becomes available during the first year of an IPO that you really need the backwind of a strong market to keep the price going higher.

It is a simple exercise of supply and demand. Most VCs and employees are anxious to sell at even 50 to 60% discount of the IPO price, because that still means a 2 to 10-bager for them if not more. If their company has managed to go public, it is already a success.

Unless it is a bull market and the initial float is small, the majority of IPOs are terrible investments during the first 6 to 9 months of their existence. It is much wiser to wait for a proper base to form and buy on a breakout to new highs than to hurry and buy blindly.

Some people like to point to Google ($GOOG) and Chipotle ($CMG) as two examples of successful IPOs, but it seems they have forgotten why this was the case:

– It was a bull market when they went public;

– they were relatively early in their growth stage;

– they had relatively small float.

My definition of a small float is under 50 million shares. Facebook has 1 billion shares. And besides, the market is not healthy today.

Is Facebook a great investment here?  – I don’t know. When in doubt, I stay out.


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