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So, after all the drama and wait, Facebook (FB) finally went public on Friday, May 18th. And what an anti-climax it was. The stock ran up a bit at open but quickly fell back to its IPO level of $38. This was totally unexpected as the hype around the stock made it seem like it would close up at least 10 to 20%. Below are 4 reasons why most investors would do well staying clear of FB, unless you have the skill and the guts to play it as a short.

Morgan Stanley: By now, almost everyone knows the stock was clearly being supported by its underwriter, Morgan Stanley (MS) at the IPO price level of $38. It is hard to believe that not one order got filled below $38 when the stock was clearly in a free fall from the $42 range. Check this link for more details. The red flag here is MS will only have so much cash to buy and there will come a point and very soon at that, that it will not be able to buy more and support the FB's stock. The fall is inevitable.

Further supporting the point about FB's current price being supported by Morgan Stanley, Renren (RENN) and Zynga (ZNGA) - two names commonly associated with social networking got hammered because of FB's weak opening. And, no the chart below does not indicate FB's general support at the $38 level. It is clearly propped up by the underwriters.


(Click to enlarge)

Valuation: Investors typically bash Chinese stocks for being overvalued. Surprise, surprise FB is much more richly valued than say Renren. We are not suggesting you to go buy Renren but the point is, FB looks ridiculously valued for a flimsy model. Even if FB meets the 2013 expected EPS of 49 cents a share, its PE will be sky high at almost 80. In a market that repeatedly gets into selling mode because of never ending woes in Europe, why would anyone want to be holding a stock so richly valued ?

And what does FB produce exactly ? What is the value proposition that is so tough to imitate ? Check out this article by Seeking Alpha contributor "Valuentum" that talks about this very question.

Where Is The Growth ?: FB already has 900 million users. The world population as of this writing is about 6.8 billion. With almost 1/6th of the world supposedly using FB already, where is the growth in terms of number of users ? Yes, FB relies heavily on ads for its revenue but who knows if General Motors (GM) pulling out is a sign of things to come. It is easy to brush off GM as an "old economy company" that does not understand the importance of social media but fact is, it does not augur well for FB right at the time of its IPO.

As a side note, almost everyone is our family holds a FB account but the frequency of logging in or for that matter clicking on one of those ads has drastically reduced. We are fairly certain the 5 accounts we have contribute next to nothing for the ad clicks :)

Recent IPOs: Sometimes history is the best teacher. Take a look at the stats presented in this article and see how the IPOs have done just a few months after going public. Why should you buy the shares that insiders are so eager to dump and cash out ? Even Jim Cramer, who is a well known advocate for growth stocks advices the average Joe to stay out of this frenzy as he believes insider dumping is extremely high in FB's IPO.

Continue to Part 2 >>

Source: 4 Reasons To Stay Clear Of Facebook: Part 1