Facebook Retail Investors Seen Missing Day-One IPO Surge

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. (FB)

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 U.S. 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. (GOOG) 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.

No Bargain

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.

Facebook’s fame has drawn individual investors such as Morrison, 51, who doesn’t use the service, though she says her two daughters -- ages 20 and 23 -- are addicts.

“I’ve never gotten in on anything at the ground level,” said Morrison, who runs accounting at Empyrion Wealth Management in Roseville, California, and is turning to one of its financial advisers to help her get stock. “I thought this would be the perfect opportunity to go ahead and give it a try.”

Buying Post-IPO

While Morrison says she’s more excited about the experience of owning part of Facebook than the potential returns, rookie investors aiming to make a quick buck have reasons to be cautious.

Investors who are unable to get in at the IPO price and buy after the run-up have historically struggled to beat the market. For those who want to buy Facebook or any other IPO, University of Maryland’s Hoberg recommends purchasing a basket of at least five stocks for some diversification.

Reality isn’t tempering the enthusiasm. At Scottrade Inc.’s branch in Pleasanton, California, about 35 miles northeast of Facebook’s headquarters, Rod Williams has been walking first- time investors through the process of how to buy Facebook shares. Inquiries picked up after the company filed its prospectus in February, said Williams, who’s worked at Scottrade branches for 12 years.

Limit Orders

Scottrade lets customers make investments online or in person. Customers can place a so-called limit order, indicating the highest price they’re willing to pay, before the stock starts trading. After that, they can also place a market order, which is an order to buy at the best available price.

Among major Internet brokerage companies, only E*Trade Financial Corp. (ETFC)’s securities unit is listed as an underwriter for Facebook’s IPO. The New York-based company is one of 33 firms that will probably get some allocation of Facebook stock for clients, though the amounts haven’t been specified.

ShareBuilder, owned by Capital One Financial Corp., is expecting increased volume on the day of Facebook’s IPO, because the trading site caters to a younger demographic, said Dan Greenshields, president of ShareBuilder.

When LinkedIn Corp., Groupon and Zynga Inc. went public last year, they each accounted for more than 30 percent of total orders on the day of their debuts, according to ShareBuilder.

Bull Case: Google

Facebook inquiries are already surging. On May 4, the day after the company disclosed its initial price range, Facebook accounted for 11 percent of all calls and 23 percent of e-mails from customers, according to ShareBuilder. That’s more than double the prior day.

“Our customers are generally in their 30s and probably all Facebook users,” Greenshields said. “My guess is we’re going to have pretty big demand.”

Investors seeking a bullish case for buying on day one can look back to Google’s IPO. The world’s largest search engine sold shares at $85 each in August 2004. The Mountain View, California-based company jumped 18 percent to $100.34 in its debut, and investors never looked back. By year-end, the stock had almost doubled from that first-day closing price, and is up more than seven-fold since the IPO.

Facebook’s initial valuation will dwarf Google’s. At $35 a share, Facebook’s $96 billion market value would make it the largest IPO on record for an Internet company. Google was valued at $23 billion, or about a quarter of Facebook’s valuation, even with about half as much annual revenue before its IPO.

Making Hay on Hype

Less savvy buyers are unlikely to care, said Michael Sha, Chief Executive Officer of SigFig, a San Francisco-based Internet company that helps investors manage their portfolios.

“A lot of time the retail investor isn’t thinking about valuation,” Sha said. They often “end up being the ones that buy high,” he said.

Some individual investors are looking to take advantage of the mayhem. Tim Yuen, a software engineer in San Jose, California, is aiming to buy Facebook shares at $45 to $50 a share using his TD Ameritrade Holding Corp. account and then sell if the stock jumps further. He previously tried to acquire shares on the private market, but couldn’t because the investment minimum was too high.

“I’ll probably see how well it opens up that morning and follow it,” Yuen said. “I know there’s a lot of hype for it.”

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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