Facebook’s IPO inspired scores of first-time investors to put their money where their status updates are.
Many of those who bought shares of Facebook Friday appear to be new to stocks. ShareBuilder.com, which allows retail investors to make direct investments online, says 40% of all queries in the last 24 hours related to Facebook’s IPO and reported a 20-fold increase on the number of new client accounts opened in the last week. Max Wolff, an analyst at Greencrest Capital Management in New York, estimates that retail investors will make up around 20% of Facebook’s IPO – more than the usual 10% to 15% for an one of this kind. “A lot of Facebook members are turning into first-time investors,” he says. “For them it’s magical, it’s sentimental, it’s a global media event.”
In fact, some first-time investors acknowledge that they’re betting on Facebook because of the hype – not despite it. Michael McHale, a New York-based artisan industrial chandelier maker, spent $1,500 advertising on Facebook and $1,000 on shares. “Return on my first investment in Facebook was zero,” he says. “Facebook has not come up with once in conversation with any of my new clients.” He’s more hopeful for his stock. “I don’t expect to hold onto it for long,” McHale says.
Other first-time investors are taking a longer term approach. Michael Provitera, a professor of organizational behavior at Barry University in Miami Shores, Fla., bought $4,000 worth of shares. “Over 10-20 years it should be a great investment,” he says.
Some experts are skeptical. They say any investor — and especially someone new to the stock market — should make their decisions based on the company’s valuation. At its IPO price, Facebook is valued at around 25 times sales, says Brian Hamilton, CEO of Sageworks, a financial information company based in Raleigh, NC. If Apple was valued at a multiple comparable to Facebook, its would be worth $2.7 trillion rather than its current market capitalization of $500 billion, he says. Wolf agrees, adding that the only first-time investors who will win big will be the estimated 1,000 Facebook employees who are expected to become overnight millionaires. As for the other first timers: “Those people who are buying into Mark Zuckerberg’s success story should buy his biography instead,” he says. “It’s cheaper than the shares and they can re-gift it.”
Novice investors are better spending their money elsewhere, analysts say. Charles Sizemore, a financial adviser in Dallas, Tx., recommends small investors diversify among several dividend-payers that are trading at low prices relative to earnings; he suggests other household names like Johnson & Johnson and Procter & Gamble.
Still, these virgin investors say they’ve missed out investing in companies early. “Caution,” McHale says, had always prevented him from dabbling in stocks in the past. Provitera says that given the stock’s appreciation, he’d be a lot better off had he bought Apple when the iPhone was originally released in 2007. He didn’t want to make the same mistake with Facebook. “You should stand by the product that you love and that you’re a part of,” Provitera says. “If you use Facebook, buy it.”