The case for buying Facebook is that it is the biggest Internet deal since Google (symbol: GOOG). There are some 800 million Facebook users worldwide, and that means a $10 billion IPO values each user at around $125. How does Facebook make money? The site sells data it gathers about our private lives and our personal information to advertisers.
Though valuations do matter in the long term, good luck determining what Facebook is really worth, says Clark, who with a partner founded Clark & Goshow Financial Strategies Group in Malvern. Despite any analysis, "I would argue the typical investor has no idea of the valuation or what numbers have meaning. It's mostly crystal ball right now."
Instead, he likens buying Facebook's IPO to buying a Powerball ticket or gambling at Parx and SugarHouse. "Those who will make money will be the company executives and early investors, and I'll bet most of them don't have a target price in mind nor the discipline to walk away if and when their target price is hit."
Most advisers say IPOs aren't suitable for lower-risk portfolios or those living on their investments or a fixed income. And it's a mistake to invest based on regret, he adds. "Paraphrasing Warren Buffet, you need two things to be successful: a reasonable plan and the ability to stick to it. Sticking to it is the hard part."
If Facebook is like any of the other Internet IPOs that have come along in the last year, expect extreme swings in price. Among those that have gone public recently are Zynga (ZNGA), Zillow (Z), LinkedIn (LKND), Angie's List (ANGI), Jive Software (JIVE), Pandora Media (P), Groupon (GRPN), and FriendFinder Networks (FFN). As an example, FriendFinder in the last year has ranged in price between $10 and 50 cents a share.
