"Ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind." -- Gordon Gecko
In the movie "Wall Street," Gordon Gecko, played by Michael Douglas, describes how greed can be beneficial in the business world. Despite this movie being fictional, greed is a characteristic that is seen every day in the business world. The Facebook (NASDAQ:FB) IPO can be described as a classic textbook case of greed, as initial investors' expectations didn't meet demand and there are too many shares compared to demand for them. Greed can be seen as positive or negative in the market, and Facebook's drop in share price since its IPO reminds me of Tom Petty's song "Free Fallin'" as investors can find it difficult to put a clear valuation on Facebook. An unclear valuation and an oversubscribed stock should serve as warning signs for newer investors to not be greedy and try to call a bottom when investing in Facebook.
Greed can carry a lot of positives when a larger audience can benefit, but when only a small percentage of people can actually benefit from greed it can be seen as being too greedy. Investors who participated in Facebook's second market and employees who own lots of shares as a form of compensation are currently the "real" winners. For the average retail investor who couldn't participate in Facebook's second market and invested in Facebook when it went public on May 18, 2012, they were quickly mounting losses.
At the time I am writing this article, Facebook is trading around $27.00 and since the IPO debut, Facebook is down over 20%. Investing in an IPO can sometimes be like moving an army. Investors may send the first wave of money and if this money gets lost, then after a certain percentage loss investors may consider deploying more capital -- or what is known as an average cost down method. While the 20% drop in Facebook shares may seem ripe to take a shot at, I believe people who have not already invested in it should wait until at least the lock period ends before considering it for the following reasons:
1. Facebook currently has a high price-to-earnings ratio of 81.61. When taking a look at Facebook compared to three major technology stocks, here are the results:
Apple (NASDAQ:AAPL) P/E = 13.7
Google (NASDAQ:GOOG) P/E = 17.93
Microsoft (NASDAQ:MSFT) P/E = 10.64
While there is nothing wrong with a high price-to-earnings ratio, if growth slows down this can significantly affect the share price.
2. Facebook has a current stock value per employee of over 24 million. To calculate stock value per employee, stock value is market capitalization divided by year-end employees. Using the same three companies above, here are the results:
Apple's stock value per employee = 8.6 million
Google's stock value per employee = 5.8 million
Microsoft's stock value per employee = 2.7 million
Note: Stock value per employee is subject to change as market capitalization fluctuates, and this data is based on when Facebook was at $30 per share.
Apple, Google, and Microsoft are companies that have weathered a variety of economic and consumer environments and all three have multiple steams of revenue. Facebook has yet to prove itself outside of social media with consumer-driven devices such as music, cell phones, apps and other devices for which there is consumer demand.
3. In the future, Facebook will need to guide its millions of registered users toward products and services that the three companies listed above already have a significant footprint established in. According to a Seeking Alpha Market Currents post on Facebook, "a Facebook phone will arrive next year, multiple sources tell the New York Times' Nick Bilton." In my opinion, Facebook will most likely have to work with Apple, Google or Microsoft rather than work against them, since Apple and Google have a significant market share in the cell phone market. Also, if investors believe Facebook will be entering the cell phone market, the main question investors will have to ask themselves is: Is there more room for another competitor in an extremely competitive sector?
4. Facebook receives a lot of its revenue from advertisements, and while the exposure that Facebook can bring to small and medium-sized businesses can lead to a larger consumer base, investors may have to ponder whether large companies really need Facebook -- or does Facebook need them.
In conclusion, Facebook has only been around for a fraction of the time that Apple, Google and Microsoft have been publicly traded companies. Morgan Stanley (NYSE:MS) may have been too greedy in wanting to raise the IPO price and issue additional shares, but I believe the next level of greed will come from average retail investors who believe they can catch a Facebook bottom. Facebook will also have a lock-up expiration coming in three months, and for investors who have been invested in Facebook for a long time, I would expect some profit taking to occur.
Facebook may be great for the consumer, but this doesn't mean Facebook will be a great investment. I feel the average retail investor needs to separate their love of Facebook from their reasons for wanting to invest in the company; otherwise, greed may get the better part of you. Currently, the best thing investors can do is just stay away from Facebook as an investment.
Disclosure: I am long AAPL. I am also long Apple via OTM calls.