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Book Review: The Facebook IPO Primer

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There is more money to be lost than made in most controversial IPOs, on average. Don't get me wrong, this is a good book, and the author knows what she is talking about, but whether one should buy Facebook in its IPO next month is a huge open question, and I would encourage you to read this book to think through the problem.

If you read the book, you will get a healthy dose of skepticism, mixed with the idea that many large IPOs in tech have been successful, like Google. The main idea is that you have to do due diligence. All snowflakes have six corners, but they are all different.

The book gives you five different ways to value Facebook, and those methods are all over the map, as they should be for a company where the economics are yet to be determined. At least it is profitable.

The range of valuation gives everyone something to hang onto, but the thought process should force everyone to think about how Facebook will monetize all of their users. Will the users behave in a way that allows Facebook to make money off them? So far, yes, but the future is far more volatile than I can imagine.

In general, I would advise readers to avoid IPOs. Most people lose money in buying them on the secondary markets. Better you should buy stock in less flashy businesses like utilities, insurance, and energy stocks. You will make more money there -- businesses with a high earnings yield tend to do better than other stocks, and Facebook does not make it there, for now. Buying Facebook implies a company that will grow far more rapidly than most, and far a long time, which is not common.

If you are thinking about buying shares of Facebook, spend five bucks or so, and get this book. It's less than a brokerage commission, and worth more than most in educating you about the value of Facebook.

Quibbles

None; this is a good book. What matters most is how you think about it.

Who would benefit from this book: If you want to buy the Facebook IPO, buy this book and learn something. Be aware before you buy, or be dissuaded before you do nothing. If you want to, you can buy the book here: The Facebook IPO Primer.

Full disclosure: The publisher asked if I wanted to read the book electronically. I said "yes" and I downloaded it and read it.

If you enter Amazon through my site, and you buy anything, I get a small commission. This is my main source of blog revenue. I prefer this to a "tip jar" because I want you to get something you want, rather than merely giving me a tip. Book reviews take time, particularly with the reading, which most book reviewers don't do in full, and I typically do. (When I don't, I mention that I scanned the book. Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website. Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites. Whether you buy at Amazon directly or enter via my site, your prices don't change.

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About the Author

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website RealMoney.com (http://www.RealMoney.com). Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that. In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. My chief responsibility will be to develop economic analysis with equity and fixed income strategies and provide advice to the firm’s sales & trading staff and its client base. Beyond that, we hope to develop my value investing into a product for out clients.

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