Ok, let’s be honest. There are a ton of reasons why I’m an idiot, but in the interest of time (and my ego) I’m going to focus on just one of them today. (Don’t worry, I’m sure I’ll bring up many more of them in the future).
After my brilliant (but cheezily titled) post last week that tried to warn everyone to use some caution before investing in Facebook on the day it IPO’d, I went ahead and ignored my own advice, bought some shares, and gambled that Facebook would pop.
I was wrong. Spectacularly wrong.
The IPO price was $38, and the stock reached a high at $45 around 11:30am on Friday, May 18, before quickly falling back to $38. The stock briefly got back up to around $41 or $42 before closing up only $0.23 at $38.23. This was very unexpected as most people expected there to be a significant pop in the stock price on day 1.
The real carnage happened after the weekend on Monday, as the stock closed at $34.03, down 10.99% from Friday’s close and down a staggering 24.38% from the high of $45 during the day on Friday.
The only good news is that it turns out my prediction to be cautious was pretty spot on, so at least I have that going for me.
Okay, so let’s try and figure out what does the last two trading days tell us about Facebook’s IPO:
In any case, it has been quite a while since an IPO garnered as much publicity as Facebook and it has been fascinating to follow the mainstream attention it has received. When Facebook releases their quarterly earnings I will likely write another post about the Company to see how they are doing.
Everyone is talking about Facebook’s IPO that is taking place tomorrow. I went to a wedding last weekend and people ranging from my parents to my friends to the DJ (ok maybe not him) were discussing the IPO and whether they should try and buy the stock.
I told everyone the same thing - if you buy Facebook’s stock tomorrow you are doing the equivalent of putting your money on black or red and spinning the roulette wheel.
Now, I am NOT saying that I think buying Facebook stock is a bad idea - in fact, I might buy some tomorrow. What I am saying is that: a) facebook is a risky company to invest in at the current valuation, and b) buying its stock on the day it IPO’s is extremely risky due to what I expect will be massive swings in the stock price tomorrow.
The appeal of getting in on tomorrow’s IPO is obvious - wealthy investors have been trying for years to get their hands on Facebook stock through private stock sales via services like SecondMarket and have been berating their brokers for the past 6 months to get a piece of the IPO at the IPO price, which has apparently been set at $38/share. The IPO Price is the price at which Facebook sells its stock to hedge funds, institutional investors (mutual funds, pension funds, etc.), and the 1 percent (aka high net worth individuals). These stock sales occur before the market opens tomorrow.
For the rest of us poor shmucks who don’t have millions in the bank, there is zero chance of getting in at Facebook’s IPO Price of $38 so we have to wait until the market opens at 9:30 AM tomorrow morning and Facebook starts officially trading on the NASDAQ before we can buy Facebook.
However, since there is so much demand for Facebook stock, it is very likely that Facebook’s stock will open at a price higher (or significantly higher) than the $38 IPO price. And recent data shows that recent tech IPOs have tended not to live up to their initial hype.
CNN has a great article that highlights some of the risks of investing in Tech IPOs.
Of the 31 Internet IPOs held since the beginning of 2011, 22 are currently trading below their closing price on the day they went public. Here’s an even scarier stat: 16 are trading below their offer price.
Now to be fair, these 31 IPOs did pop a collective 34% on the day they went public. But this proves my point about how risky it is to buy a stock on its IPO day.
Let’s use an example. pretend Initech has an IPO price of $100. Since there is so much demand for the company’s stock, the stock begins trading at $120 (up 20%). During the day, the stock shoots up to $150 by noon. But some intern bought some traders a crappy lunch, so by 1:30 the stock is down to $110. But then they realize that it’s Friday, the weekend is coming, and it’s time to party so the stock shoots all the way up to $175. Four months later, when the initial excitement died down, the stock is now trading at a measly $68.
Sound unrealistic? Who knows. The recent tech IPOs have shown that anything can happen on day 1, and that stock prices don’t always keep going up. If you had bought Initech at the end of the IPO Day around $170, you would be kicking yourself after 4 months.
Here is my advice - Know your risk tolerance. I’m 25, I have a lifetime (hopefully) of earning potential, and I may or may not have won a little money playing blackjack at a casino in Colorado last night. I can afford to take the risk.
If you aren’t willing to lose a substantial portion of your investment, I would recommend not investing in Facebook tomorrow. Or at least don’t put the whole amount you want to ultimately put in.
Sure, there is a great chance the stock might pop 25% or 50% or 100% tomorrow, but who knows how sustainable it will be.
If you’re going to buy Facebook tomorrow, remember that you’re playing in a casino and you have a 50/50 shot of landing in the black or red.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment.
- Image from Thinkstock/CNNMoney