Will the Facebook IPO Skyrocket, then Plummet?

Roller Coaster

The buildup to the Facebook IPO scheduled for a week from now has been anything but boring. Even the boring parts are being blown up in ways that make them exciting, such as the media’s fascination with Mark Zuckerberg’s hoodie during his IPO roadshow. Long-term investors are starting to get the jitters based upon declarations of “innovation before profits” coming from Facebook’s upper management. Is the table being set for a roller coaster ride after their initial public offering?

Yes.

Facebook will explode out of the gates. It will be the hottest stock to buy for the first couple of weeks as quick-in-quick-out investors buy it up and watch their money multiply. They will all be watching for signs of the turning point when the first big selloff will begin, at which time the stocks will start to fall sharply, possibly below their IPO value. Will it be two months? Two weeks? Two days? Very few people know for sure (yes, there are some who actually do know with relative certainty because they’ll be part of the reason for it happening in the first place), but it’s very clear that it will happen at some point.

How Facebook recovers from that will determine how successful it will be long-term.

This isn’t beyond Facebook’s control. They may have scared off the all-important long-term money that makes most stocks much more stable, but they still have a hand in it through buzz. If they can create positive buzz surrounding their products and services, it will attract the WSJ Front Pagers (those who invest based upon news rather than insights) who can help elevate the bottom to an acceptable level, hopefully above the IPO price.

For the long haul, they’ll need to demonstrate growth beyond users. The revenue is being outpaced by marketing expenses and user adoption which is always a bad sign. The investors who plugged into Google and Apple will wait to see forward movement in profits before diving in. The sooner, the better for Facebook as they are unlikely to make a big move since forking over $1 billion for Instagram.

If they do make a big move, it would be to take over Bing, a move that some expect shortly after the IPO.

At the end of the day it’s not a question of whether Facebook will skyrocket, then plummet. It’s a question of where the bottom will be and whether they can then grow it at a steady pace to go beyond their early high point before the 12-month mark. If they can, they should have a long-term winner. If not, they may regret going public in the first place.

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