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5 Reasons Why the Facebook IPO is Insane and Dangerous

May 18, 2012
Simon Maierhofer

Will investors “Like” Facebook stock? The IPO is within striking distance and investors will soon know. Regardless of the outcome, Facebook is the most insane (and dangerous) IPO in history.

The countdown is on. Just a few more days and mortals like you and I can own Facebook shares – if we want to.

And many will line up to buy, because according to Wall Street and the cheer leading media, this time will be different. There is no social media bubble and Facebook will be a great investment. Really?

Social media is in a frenzy, and predicting the outcome of a frenzy is impossible. But what we do know is that Facebook’s valuation – expected to be around $100 billion - is insane. How insane? Take a look:

Is That Insane or What?

- Assuming a valuation of $100B, FB will trade at 33x advertising revenues. Google trades at 5.5x.
- At $100B, FB will be worth more than: Caterpillar, American Express, Home Depot, Walt Disney and even McDonalds. In fact, 15 components of the mighty DJIA (DJI: ^DJI) have a market cap of less than $100B.
- The market value of Google at its IPO was "only" $27B
- Apple currently trades around 3.8x sales. The same metric applied to FB would put its valuation at $15B.

It Hurts the Most Right After it Feels the Best

Since we’re talking about Apple, it was stuck within its very own valuation bubble less than a month ago.

On April 3, CNBC reported that: “Apple’s stock gets first $1,000-plus price target.” Reuters reported that: “Apple-mania spreads, Piper Jaffray sees $1,000 stock.”

A MarketWatch blog said that: “Bottom line is that you should own Apple, it’s firing on all cylinders and identified Must-own Apple supplier stocks.” The blog was written a few days before Apple topped and the recommended supplier stocks are down 15 – 20%.

Quite contrary to Wall Street’s cheer leaders, the April ETF Profit Strategy Newsletter identified a rare bearish technical pattern in Apple that could trigger a 10 – 20% decline and warned that the market as a whole is getting close to a correction.

Difference Between Bad Stock and Bad Timing

There’s a difference between a bad stock and bad timing. Apple is a great company, but when you see too much excitement stirred up by any one stock or index – especially one that’s the biggest component of the S&P 500 (SNP: ^GSPC) and Nasdaq (Nasdaq: ^IXIC) – you know it’s time to stand aside.

Back to Facebook. What will happen to its shares? I’ll give you my 2 cents worth in a moment, but first I’d like to share the fate of other social media IPO’s. The chart below shows the performance of recent IPO’s from their IPO closing price to the May 10 closing price. Only two out of seven are positive and four are down 15% or more.


So, here are my 2 cents worth: I think Facebook will disappoint longer-term shareholders. The IPO frenzy may last for a few weeks or months, but will cool noticeably by next year. I expect the stock to decline at least 30% by sometime in 2013.

Ongoing technical analysis and market forecasts for Apple, major U.S. indexes, gold, silver, euro and the dollar, along with the second most important U.S. Company are provided via the ETF Profit Strategy Newsletter’s semi-weekly updates.

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