Here's 'The Deal' With The Facebook IPO: A Guide
As most everyone with an Internet connection has heard over the past week, Facebook is going public today (in fact, it started about 90 minutes ago). What does that mean? Should you invest? Will you get rich?
Answer to all: Who knows?
Actually, it's easy to convey what it means, so let's start there.
We'll start simple, since most people out there have no need to know what a lot of this finance jargon is all about. Facebook, the social media behemoth was created by a few kids at Harvard. In fact, they made a movie about it. It won some awards. When those kids needed money to make the company and the site bigger and better, they gave away some ownership of the company to a venture capital firm called Accel Partners, who gave the kids $12.7 million to improve the site.
Until now, Facebook has made some money through ads and licensing and partnerships, but the people that own the site haven't been able to realize cash from the ownership of the mutli-billion dollar site. Of course, they've sold some of their stakes here and there, but this IPO means they're selling much of the company to the public.
The shares are going to be offered to the public (IPO stands for Initial Public Offering) at $38 bucks each, which some analysts say is high and some say is low. Such is the nature of the financial world. The IPO has already sold 421 million shares at $38 bucks each. This has raised $16 billion dollars for the company. That's only a fraction of the total stake in the company, but the IPO is important for a big reason apart from raising cash. This IPO serves as a litmus test for how the market values the company as a whole.
If the market values X percent of Facebook at Y dollars, then it's pretty easy to extrapolate what the market values 100% of Facebook at. As such, for the first time, the public markets get to determine how much Facebook is worth. In the past, private venture capital firms determined the value, but those valuations were made by non-representative samples of investors during times of explosive and undertain growth.
Now, the public (the last word in valuations, normally) gets to weigh in on where they see Facebook going. And, as I type this sentence, Facebook is sitting at 40.52 per share, which means that investors found it to be a value at the $38 per share, and are now buying it on the secondary market for even more. This means that Facebook as a whole is valued at $110.65 billion dollars.
That's a lot of dollars. Apple is valued at $503 billion, GM is a scant $34 billion, and Coke is at $167 billion.
HOWEVER, you know those people that wait in line for iPhones that would pay $1,000 just to be the first to get the newest phone on the market? Lots of people buying Facebook stock on the secondary market are like those people. Irrational investors who are more concerned with acquiring "Facebook" because they know the name and it's new than because it's valuable stock to own. In a few weeks, months, or maybe it will take years, these guys will disappear, owning Facebook won't be "cool," Justin Timberlake will get fat, and we'll see how an efficient market prices Facebook. While today is the first benchmark for Facebook pricing, it's not the best one.
Ok. That's an overview of what everyone is talking about. All this discussion begs the question, "Is Facebook a good stock to own?"
I don't know. And you shouldn't get that kind of advice from a website called "Just A Guy Thing," anyway. Go see a stockbroker.