We’ve all felt the magnetic pull of an IPO. The roaring 90’s come back to us. Why am I a blogger? I could invest in an IPO and be knee-deep in a Carribean island swimming pool holding a margarita the size of my face. Then again, I wouldn’t hold the margarita. I’d hire someone else to hold it.
So…the upcoming Facebook and Zynga IPOs – Should You Get In or Stay Out?
IPOs (initial public offering) seem to have lost a little of their luster over the past decade or so, but nevertheless everyone still turns their heads when a “big name” walks by and announces an IPO. Earlier this year it was the Groupon IPO, last year it was the “new” General Motors.
When a company announces their IPO, many people want “in” – it’s easy to see why: who among us hasn’t asked (at least to themselves, if not aloud) I wonder what would’ve happened if…
• I would’ve bought Microsoft in the 1980s;
• I would’ve bought Apple when Steve Jobs came back on board;
• I would’ve bought Google at $85/share…
As a financial advisor, my goal is to make sure my clients don’t “should” all over themselves.
(OK sidebar: If you didn’t laugh at that last sentence, you really need to read it out loud. Go ahead…get it? “Should” on one’s self? I can’t believe my comedy career never took off…okay….back to our regularly scheduled programming)
It tempts you because it seems like easy money. Who doesn’t like to live in fantasy land for a few minutes each day? My fantasy investment purchase? Greek debt insurance 2 years ago. That’s some serious jenga. But I digress.
So, here’s the deal with IPOs and why they’re not your best option:
1. Unless you have an “in” (think: your brother works for Facebook) you’re not gonna get any IPO shares
This means that if you try to buy into the Facebook IPO the day it opens, you won’t receive the IPO price (which is what everyone will talk about on CNBC). You’ll purchase your shares at a different–and often much higher–cost.
2. They don’t usually make money – at least not right away:
Image via CrunchBase
Like visions of gold, we conveniently remember IPO “winners” like Google or Amazon. We block out the long, tired stack of losers. Remember Pets.com? How about Vonage…they aren’t dead, but that IPO was a mess. eToys? Amazon.com, a mammoth stock by today’s standards, IPO’d in mid-1997…and didn’t make any percentage gains for several months. Google’s IPO occurred in 2004. The stock experienced a big spike, and then lay flat for 6 months. Often, IPOs don’t pay off for years, even when they’re winners like Google or Amazon.
3. The people who make the real money? The CEO, executive team and investment bankers. This is a big cha ching! event for them.
The Blackstone Group, a private equity and asset management firm, announced in 2007 announced they were going public. The issue drew so much attention that no one really paid any attention to the prospectus.
Why does it matter?
Well, it turns out that The Blackstone Group IPO launch only included “part” of their business (not that part that made money, mind you). After all the shares were gobbled up and the CEO and investment bankers off-loaded their shares (the CEO made $2.6 Billion–lovin’ the capital “B”), any gullible shareholders were stuck with a 42% loss in the first 12 months. Here’s a great book
discussing the lengths at which dirty CEO’s will go to cover their fraud.
Here’s our thoughts:
If you want to own a “cool new shiny Zynga IPO”, but don’t want to do the homework involved with reading the prospectus or making friends with an employee to get the “insider” price, buy a mutual fund in that same space. If it’s as awesome as you think, the fund manager will buy some (probably at the actual Zynga IPO price) and you’ll own some by proxy. If it’s a sham, the fund manager, who has a thousand times more resources than you, will probably pass – allowing you the easy way to decide whether to pass as well.
Plus, really, do you think it’s a good idea to put every dollar you own in Zynga shares–even if you could? What’s the best that could happen? Your money could double? Triple?
Sure. But what’s the risk?
We’re curious about your opinion. What do you think about the Facebook or Zynga IPO? Are you buying the hype?
Great Post on Zynga IPOs Joe!!
Yeah, Joe, Good Post…:)
TheOtherGuy wrote this brilliant post, Jonny. I can’t be bothered to spend time on anything remotely resembling an analytical discussion.
Zynga is way too expensive at 10+ billion dollars. The valuation is way out of line with other games companies and I don’t know if they are just a fad or a real thing.
I agree completely. It just seems like insanity. But, I’ve been accused of insanity before, so who knows….
I’m sure the email offer inviting me to buy Zynga and Facebook was just grabbed by my spam blocker….It’ll show up any day.
I agree with your analysis (I know you are honored!)
My best stock pick of the last 10 years has been…..drum rolllll: Southern Company, which wasn’t really a new pick, just a DRIP I have ignored to my benefit…Nothing sexy, just reinvesting those Divs….
Dr. Dean – Wait. You mean your ‘best’ idea is to buy something that’s solid and forget about it??? Earth-shattering! Ha ha. We should all be so crazy. Thanks for you comment 🙂
I wouldn’t doubt that you’ll find the “insider” deal in your spam blocker, Dr. Dean. That’s why we’re trying to get to know you better…you “big city” boys get the inside line on all the great deals.
I think both companies are overvalued. Agreed, both are popular and can make money, but not to the extent investors expect them to. At least not with the current business model.
Of course, if these companies diversify creatively like Amazon, then that’s a different story.
I agree. The good news is that we’ll have plenty of time to evaluate the company’s ability to diversify well after the IPO is over.
So what to do? Six months post-IPO, after the the dust has settled and former dirty CEOs decamped for destinations Caribbean, pick up a few shares? Decisions, decisions….
Even without the decamped CEO scenarios, that’s when I love looking at these companies…about that six month mark you mention…because now I actually have some public data and I can evaluate how the firm has responded to the pressure of having to show financial data every stinking quarter.
In these days which financial advisers can we trust anymore? The little man keeps getting stepped on by these sharks.
Mark – Thanks for your comment. It’s true, there are some advisors who are snakes, but truthfully most of them honestly want to help. That being said, ‘wanting to help’ and ‘doing the right thing for the client’ sometimes are different. that’s where AverageJoe and I come in – we’ve been through it (i’m still in it) and we can give free advice to anyone who wants it – no strings attached!
Its a tricky call, there are so many things to look at now as there were when the original offering was made. I think promises of living on an island off the back of it or promises of anything at all are a little far fetched!
Claire – Agreed. Always best to remember that it’s going to be a gamble whenever you add money to a stock-market based offering.
Now that its official that facebook is going public. Now facebook may be a really great company but that does not mean that the stock is a great buy when it does go public. Everybody’s uncles uncles believes facebook will be the next google what does that tell you.
It suggests to me that it probably isn’t. But then again, I’m contrarian by nature, as you can see by this blog.