Five Reasons Why You Will Lose Money With Facebook Stock

By: Tony DePasquale – President, Elysien Private Wealth

I have received a lot of client questions regarding the Facebook initial public offering (IPO) that will be available to accredited investors at the end of this week. Many of our clients have contacted me and are interested in the company. With all the buzz around Facebook over the last few years, it is easy to see why so many people are talking about this new stock. That being said, as a company, Facebook has some major hurdles to climb in order to make this business a good investment for individual investors. Below are five reasons why you should steer clear of the Facebook IPO.


1) Revenue Concerns –  One of the biggest reasons Google is so profitable is because 1 in 250 people will click on paid ads in order to find services. With Facebook, only 1 in 2,000 people are clicking on ads and utilizing these services. The revenue model is untested and poses some major hurdles for management moving forward. What we simply do not know yet, is how this company will make money. Right now, it is mostly projections. Not a good basis for investment.

2) IPO Historical Performance – IPOs are historically bad investments for individual investors. They are bid up by institutions and dumped onto individuals. Once the market corrects the valuation, more often than not, initial  investors will take a loss. It is better to let the market find a real value of what people will pay, instead of taking the word of the valuation by the companies who underwrite and sell the stock.

3) Insider Selling – Insiders and institutions are already liquidating positions and are essentially day-trading the stock. This is a good indication that they expect the market to correct pricing, and the institutions are looking to make some money and get out quickly. Not a good sign for individual investors.

4) Losing Advertising – Facebook has already lost a major advertiser in General Motors, whose board believes the return on investment is just not there for marketing on the social media site. Not a good sign for future growth.

5) Mark Zuckerberg – If the dot-com tech bubble of the 90’s taught us anything, it should be to be wary of 20 somethings with little management experience with highly publicized websites. Many of these sites got great media attention, went public, then subsequently went bust. I am not saying Facebook will not be a long term strong company, or that their management team is inept, but I am saying that when the underwriters have listed Mr. Zuckerberg as a risk to the stock, investors should take notice.

The key to making sure your investing goals are best met is to stick with a disciplined investment philosophy. If Facebook fits within that established philosophy, then maybe the risks outlined above are not strong enough to deter you from purchasing at the IPO. However, if your philosophy does not allow for stocks such as Facebook’s, then you’re better off staying the course you’ve established. If you don’t have an established investment philosophy – or have no idea what it is – then get in touch with us today and we will work with you to avoid this costly financial mistake.

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