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The Truth Behind Facebook’s IPO

|Includes: Facebook (FB)


Facebook, the social network giant, plans to make an initial public offering in early 2012. Facebook's privately held shares were split in early October, which usually occurs pre-IPO, and further confirmed circling rumors. Of course, the public has every right to be skeptical of this common stock. Recent dot-com IPOs such as Groupon and Pandora couldn't live up to the hype, and the stocks swiftly fell below IPO prices. The recent busts in web-based corporations have been compared to the dot-com bubble of the late 90s.

However, there are some redeeming qualities to Facebook, compared to its online ancestors: Facebook has proven extremely profitable. In 2010, Facebook made about $600 million. In 2011, it's expected to triple profits and more, and generate $2 billion in EBITDA.

On the Flip Side While Facebook is profitable now, it has nowhere near the revenue momentum Google had when going public in 2004. Additionally, Facebook has the real possibility of being replaced by copycats or new fads, just as it replaced MySpace. Facebook relies only on ad revenue and commissions from social gaming (such as Farmville by Zynga). Facebook needs growing use for growing profits. And growing popularity is difficult to achieve when 500 million users already log in each day. Facebook has been valued by experts at around $100 billion, and plans to have an IPO for approximately $10 billion. This may prove a good investment, but if history is any indicator, the social network may be a little overrated.

Trading It Barring a few exceptions, most stocks fall below their IPO price fairly soon after coming out. Buying Facebook stock on the initial hype and surge upwards may prove profitable. Regardless, a stock with so much buildup is bound to disappoint in the long run, especially with such an ambitious IPO.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.