Facebook went public on the Nasdaq exchange Friday, raising $16 billion by selling 421.2 million shares. This IPO, the third-largest in US history, values Facebook at $104.2 billion. Not too shabby for a startup founded only 8 years ago. In terms of anticipation, demand and volume of shares traded, Facebook was the hottest IPO to hit the stock market since Google went public in 2004.
Overhyped? Maybe. Even so, I wanted in.
This flies squarely in the face of the disciplined investment strategy that I’ve held to for years. Grounded on the sound principles of Nobel prize winning Modern Portfolio Theory, my approach is based on a well-diversified, equity-oriented asset allocation using low-cost exchange traded funds (ETFs). David Swensen, the Yale Endowment Manager, proposed this one size fits all model portfolio for individual investors. It’s worked for me and, apart from the Microsoft (MSFT) shares I received as an employee, I own very few individual stocks.
What’s a “regular” investor to do?
For so-called retail investors, participating in IPOs like Facebook can be tricky, if nigh impossible. Allocations of these shares usually go first to institutional investors and their A-list clients. This includes preferred customers of the banks underwriting the deal. Many large online brokerage firms will at least take requests for Facebook shares, but they have rules. Some require existing balances of $500,000. Others will only consider people with a certain level of trading activity.
As an average Joe investor, buying Facebook turned out to be much easier than I’d thought. My bank, E*Trade, was one of the 33 underwriters of the Facebook IPO. When I heard that Facebook was allocating between 15% to 25% of its 421 million shares for retail customers, I entered my limit order with a maximum price of $45 for 75 shares (split between Ben and myself) after the opening bell. Despite trading glitches on the Nasdaq, I received a notice that my order executed at 11:52am. We got in at $38.01 per share, one penny above the IPO:
With the brokerage commission, we’re on the hook for $2,860.74.
A rough first day
The reason it was easy for regular investors to buy in is because Facebook’s IPO wasn’t as hot as Wall Street or the crowd had predicted. When the stock failed to “pop” Morgan Stanley, the deal’s lead underwriter, bought 63M Facebook shares ($2.3B) to create a floor around $38.
Facebook still gets its healthy raise of $16 billion and a $104 billion valuation, but those who hoped to be holding stock valued somewhere north of $60 or more per share at the end of the trading day were disappointed. Historically, stocks that don’t post double-digit gains on their first day of trading take longer to offer returns, if ever. The day of its IPO, Google closed up 18% to $100.34. Today, nearly 8 years later, Google shares are trading at six times that amount.
Is Facebook a good investment?
Predicting the ebbs and flows of the market is folly and I’m hardly qualified to speculate. As a technologist and armchair analyst, however, I can’t see Facebook’s 900+ million (and counting) user base going away anytime soon. The future is mobile, FB knows it and they’re making acquisitions to strengthen their position in the market. It’s amazing to think that not a dime of Facebook’s current $3.2 billion annual revenue comes from mobile ads, although this is predicted to change, significantly.
At the end of the day, this is an experiment. I still have my decidedly unsexy “lazy ETF” portfolio that I depend on for my theoretical retirement. So I won’t sweat it the least if Facebook fails to perform. The best investments are measured in months and years, not hours and days. So, if Facebook explodes in ten years and a four-figure investment turns into a five- or six-figure one, I won’t be complaining.
The way I see it, if Facebook is going to make money on my data — I’m entitled to a share.
