The Lessons of the Facebook IPO—Pat McKeough on YouTube

Almost three months ago, on May 18, Facebook issued one of the most highly-publicized Initial Public Offerings (IPO) in the history of Wall Street. A week before, Pat McKeough had already issued his own investment advice on the stock. He advised investors to take a pass. Just as Pat predicted, Facebook shot up briefly, only to reverse course and head into a decline that hasn’t ended yet. This week it disappointed investors again with bad earnings (as did another Internet issue that has taken a beating, games specialist Zynga Inc.). There’s a cautionary message for investors in this and it relates directly to one of Pat’s core principles: Avoid stocks that bask in the broker/media limelight. Stocks like these can cause investor expectations to rise so high that downturns can be brutal—which is exactly what happened in this instance. Here is Pat’s original warning about Facebook from May 11.
Q: Pat, a lot of people are excited about the fact that Facebook is going to start selling its stock to the public. Do you think people should buy it? Pat McKeough: Well I’d say that’s a good question. Facebook has a huge following and many people have high expectations for it. It’s entirely possible that it will shoot up on the first day it sells out. But as a company to invest in, at the price they’re selling it for, I think I’m going to take a pass, and that’s what I advise other people to do. I can tell you that with our system, we tend to downgrade or stay out of companies that are in what we call the broker/media limelight. When the brokers and media are talking about something favourably, it tends to raise investor expectations. And Facebook already has extremely high investor expectations. It may not be able to live up to those expectations, and when that happens, there can be very stunning downturns. Another risk factor is that it is a new issue after all, and a new issue comes on the market with a great deal of broker and media attention. And that fades, it evaporates, or at least reduces to a great extent after the new issue sells out. So suddenly if you quit seeing the name of your stock in the paper anymore, or not as much, you may be tempted to dump it. Looking a little further on, Facebook is a great concept, obviously it’s done wonders, but I’m not so sure it’s going to be thriving as long as many people think. Many people I talk to are kind of sick of Facebook. You know, many of the people who are sick of Facebook are somewhat older than the typical Facebook customer. So, another problem with Facebook I would say is that the guy that created it is a genius, but he’s not an experienced business genius. And the way the thing is set up, he has carte-blanche to do what he wants. And he is probably, the nature of the thing being what it is, going to make some mistakes. So my feeling is, no, I wouldn’t buy it, I wouldn’t recommend it. It’s certainly not the worst thing out there, but it’s not something I’m going to recommend. [ofie_ad] COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members Among Internet stocks, there have been some spectacular success stories and a number of equally spectacular flops. Have you had any big successes—or big disappointments—with Internet stocks? Let us know what you think in the comments section below. Click here.