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CIA’s View on Facebook

After the closing bell on the 1st February, one of the most well known tech companies in history filed paperwork with the SEC for an Initial Public Offering (IPO). In the much anticipated filing, Facebook has finally opened their books to scrutiny from investor’s on the open market.

Given Facebook’s 845 million users, the significance and popularity of this IPO cannot be underestimated. But how does this impact you specifically? What’s relevant information from the media? And, most relevant to you, what does CIA’s Investment Committee think about this historic IPO?

Let’s start with what actually happened on Wednesday and what all those abbreviations mean. Facebook took the first step in filing for an IPO by releasing a form S-1. The S-1 is a disclosure document that gives investors basic business and financial information relating to the company and its executives. We don’t know when Facebook shares will actually “go public” or begin trading on the stock exchange, but the S-1 tells us that they intend to do so sometime in the near future (within the next few months).

Now that the S-1 has been made public, potential investors from all corners of the earth can lift up the hood on Facebook as a corporation and see where their revenue comes from… how much revenue they generate… how much money they spend to stay in business… and how they earn a profit. These are the essential inner-financial workings of any company. Given this information, you as an investor can decide if it’s worth buying shares.

The only way to buy Facebook on a “pre-IPO” basis is to be a client of one of the investment banking/brokerage firms that is helping Facebook through the IPO transaction. A few select clients (usually the very largest and wealthiest) will be offered shares by their broker or investment banker. If a broker is lucky enough to be part of the elite group within the firm that is allocated a portion of the shares, they will SELL them to their clients. But, for the majority of America, the only option will be waiting until Mark Zuckerburg has rung the opening bell on the floor of either the NYSE or Nasdaq.

The view of the Investment Committee on this IPO is similar to our view on IPOs in general. We have to try to push aside the hype surrounding the idea of Facebook and actually determine the viability of Facebook as an investment. With all IPOs, the initial pricing and trading can be volatile in both directions. In fact, the actual opening price for shares can change significantly just hours before shares are set to start trading. Hype is unpredictable and impossible to value – which can mistakenly push many investors either into oncoming traffic or away from a sound underlying investment. Given this, we are cautious about diving headfirst into any IPO deal.

Our investment strategy continues to be focused around income. Facebook certainly doesn’t fit that mold; they expressly ruled out a dividend in their S-1 filing. The Investment Committee is not ruling Facebook out as a growth-oriented investment down the road. But we want to see the company continue to generate and grow their earnings while under the microscope that comes with being a new public company. We may miss making a quick buck in the first couple hours of trading, but the long-term value of investing in Facebook won’t be evident for some time. And we’re comfortable keeping that perspective in mind.

As always, if you want to talk further about the Facebook IPO please don’t hesitate to contact your advisor.


 

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