Renee Morrison has never bought a stock in her life, even after more than a decade working in financial services. That’s about to change, as she prepares to invest $2,500 in social-networking website Facebook Inc.
Facebook’s initial public offering, planned for later this month at $28 to $35 a share, presents the first opportunity for most of the site’s 900 million users and other retail investors like Morrison to become stakeholders. Chances are slim that they’ll be able to capture any of the gains that come on the first day of trading.
Only institutions with connections to the underwriters will get to buy at Facebook’s offering price, which means most retail investors will miss the initial pop -- typically where the bulk of the gains are concentrated. Of the 10 US consumer internet companies that held IPOs in the past year, nine rose in their first day of trading, and only three are still higher than their day-one closing price. Groupon Inc and Pandora Media Inc have lost more than half their value since then.
“If you’re somebody who’s not wealthy and you really want to make a Facebook investment, there’s an uphill battle,” said Gerard Hoberg, associate professor of finance at the University of Maryland. Retail investors are usually “stuck buying in the aftermarket, and the juicy return is not so easily available.”
Facebook and its holders will sell 337.4 million shares, according to a May 3 filing, giving the Menlo Park, California -based company a valuation of $96 billion at the high end of the range.
Not since Google Inc in 2004 has an IPO received so much hype, thanks to Facebook’s prevalence on laptops, phones and tablets, along with an Academy Award-winning movie about founder and Harvard University dropout Mark Zuckerberg.
Even for shareholders who get in early, Facebook won’t come at a bargain. At the high end of the proposed valuation, Facebook is asking investors to pay 99 times earnings, a higher multiple than about 99 percent of companies in the Standard & Poor’s 500 Index. It would be more costly than every member of the S&P 500 relative to earnings except for Amazon.com Inc and Equity Residential, data show.