The long awaited Facebook IPO is near. Morgan Stanley (NYSE:MS) will lead the syndicate. Goldman Sachs (NYSE:GS) did not get the lead role even though it has an investment in Facebook, but it is anticipated to have a major role.
It's a no brainer to buy with both hands as many shares of Facebook as you can get in the IPO. The probability is very high that in the days and months following the IPO investors will have opportunities to sell their shares at a nice profit. For the long-term, price earnings ratios, growth rates, etc. matter, but, it is all about supply and demand in the short-term. Investors inclined to hold for the longer-term will have plenty of opportunity to see how the stock is trading and how the fundamentals are shaping up to make a reasonable decision, to hold the stock or take profits.
In the coming days, there will be much analysis of revenues, profits, gross margins, cash flow, growth rates, etc. Certainly, such analysis will be of interest to talking heads, journalist, and academicians. Media will love the story as it will generate more viewers or readers.
The reality is that underwriters will price the IPO based on demand under the ruse of comparisons with recent internet IPOs such as Zynga (NASDAQ:ZNGA), LinkedIn (NYSE:LNKD), Pandora (NYSE:P), Renren (NYSE:RENN), Sina (NASDAQ:SINA), and Groupon (NASDAQ:GRPN).
Underwriters will justify the extremely high price of the stock based on potential growth.
Facebook is the new standard platform of communications for 800 million members. Exact numbers will not be known until the IPO is filed. Several informed sources have reported that between 2009 and 2011, Facebook's revenues grew at about 125% annual rate to $3.8 billion in 2011 with operating profit of $1.5 billion.
comScore reports that Facebook served 28% of all display ads. Brand advertisers like the narrow targeting they can achieve on Facebook.
For an investor who wants to generate profits, from a practical point of view, doing the foregoing analysis is an unnecessary torture of brain cells. None of the traditional fundamental analysis is going to make a difference.
Our qualitative estimate of the demand is around one billion shares compared to the supply of about 250 million shares. The point is that the demand is likely to be 400% of the supply.
An astute investor will buy with both hands all of the shares he or she can get in the IPO.