Buy Facebook stock? No, you shouldn't

Facebook may be your friend or where your friends hang out. But that doesn't mean the stock will be friendly to you if you rush to buy it.

Judging from my recent emails, many people who have never purchased a share of stock in their lives felt compelled to get their hands on Facebook stock when it was first offered.

But the fact that individuals seem so hungry for Facebook stock is a warning that it could be a disappointment.

Take, for example, Groupon, Zynga, Yelp and Pandora, which all recently went through hot IPOs. They attracted novice investors who loved the products and companies, and then discovered that the stocks weren't worthy of those same affections.

Consider the excitement surrounding Chicago-based Groupon's IPO in November. On the first trading day, investors gave the stock a lift from $20 a share to $26.11. When the next quarterly report was released, the daily deal company failed to deliver the profits investors were expecting, and the stock plummeted. After an upturn this week, the stock is still down 53 percent from the first day of trading.

It's a similar story with Pandora, Yelp and Zynga, which are down 38, 15 and 10 percent, respectively, from the closing prices the first day individuals could buy the stock.

"The higher the gain the first day of trading, the more the stocks have come down," said James Krapfel, a Morningstar IPO analyst. "The individual investor's chance to make money is fairly slim."

Typically, novice investors chase hot IPOs in the first few days a stock is available. At the same time, institutions, which were able to buy in earlier and cheaper, often are dumping those stocks and making a profit on the run-up in price.

Savvy investors then tend to wait for a company to report profits and sales a few weeks or months later, so they can see if the business is as solid as expected, before buying additional shares.

"Every new company has issues," said Renaissance Capital principal Kathy Shelton Smith.

That could be a concern for early Facebook investors.

Because the shares of stock were being offered at such a high price from the outset, the $38 price gave the company little room for error, Smith said. Expectations for profits and sales are great, so if the company's momentum slows — even a little as it has — or if Facebook doesn't show evidence that it can attract enough advertising to smartphones as well as computers, the stock could slump. Some analysts already are concerned because the company's growth rate has slowed a little from its peak.

Still, Smith said Renaissance has given Facebook fundamentals a high rating. Her primary concern, she said, has to do with the leadership of the company. She is worried that founder Mark Zuckerberg is too autonomous. And some analysts worry that he may be more committed to building a social network than a profitable business.

"Investments are for retirement accounts," Smith said. "Investors aren't making contributions to a charity. They need a return."

Among the recent hot IPOs, LinkedIn has been the exception, satisfying investors that it could live up to their expectations. The stock climbed from $45 the first day to $94.25 and gave a remarkable 109 percent gain to people who were lucky enough to snag shares in the IPO before the public got a crack at them. The stock, at $110.56, is 17 percent higher than the first day of trading.

Despite the excitement around the recent tech IPOs, beyond the first day of trading the stocks have underperformed some of the more typical consumer companies that have gone public in the last few months. Baggage company Tumi, Annie's foods and clothing designer Michael Kors all have stock prices substantially higher than the first day of trading. Both Annie's and Michael Kors have about doubled.

They have been lifted, said Smith, by major consumer brand names. That, of course, should help Facebook too.

Still, University of Florida finance professor Jay Ritter warns investors not to read anything into the excitement about the stock.

"Like all stocks, Facebook over the long run has less than a 50 percent chance of performing better than the stock market," Ritter said.

Gail MarksJarvis is a personal finance columnist for the Chicago Tribune.

Share This Story