With Facebook having finally announced plans for its long anticipated IPO this spring, speculation is already rife about the social network’s likely gigantic valuation and how the shares will go on to perform. For investors with anything short of many millions of dollars to invest, the circus surrounding what is expected to be the largest ever tech IPO will be one to watch rather than partake in. But even assuming we all had the money and the invite, should the prospect of diving in to the hottest ever IPO be an attractive option?
Despite the fact that CEO Mark Zuckerberg has yet to name his price – will he aim for a $100bn valuation? – the Facebook IPO has already been analysed from every angle. On one hand, commentators have muttered concerns about Zuckerberg’s letter to prospective investors (too wishy-washy), they’ve raised fears about a flood of advertising damaging user loyalty, and even questioned why the company is floating and raising money at all (when it could conceivably get away without doing either).
Supporters may claim that Facebook's best years are almost certainly ahead of it and, with 500 investors on the books, Facebook was already facing statutory reporting requirements, so why not squeeze some cash out of the situation? Likewise, Zuckerberg clearly has lofty ambitions, and a mega-fundraising is going to give him all the comfort he needs to achieve them.
But as regular readers will know, rather than chasing speculative story stocks, we believe in an evidence-based approach to investing that avoids falling foul of our innate behavioural biases. So what does the empirical research say about IPO investing? Well, to get the pulse racing, it's true that there is a mountain of research suggesting that a heady mix of behavioural finance and asymmetric information causes many flotations to get away at artificially low prices. The immediate consequence is often a first-day trading spike that makes a mint for anyone lucky enough to be holding the shares – particularly if they choose to ‘flip’, or sell them, for a profit. For investors thinking of buying shares in the aftermarket, of course, that means the Facebook IPO should be treated with extreme caution.
More generally, though, the research suggests that flotations of all sizes should carry a health warning and Facebook is no different, notwithstanding the frenzy of media attention and noise…