Facebook's (Nasdaq: FB) $16 Billion IPO: The Good, The Bad & The Ugly Truth

Face it, you want it. It seems that everyone wants a piece of the Facebook IPO.

But can you handle the truth? Will the hyped sensationalism be a boon or a boondoggle?

I'm not going to tell you what to do, whether you should buy Facebook sooner rather than later. That's up to you.

However, I will tell you that I won't be buying it right away. But I will be buying it if...

First though, here's the good the bad and the ugly truth about the company and owning "FB." [Not ready for FB shares? But still want some high-tech profits? Take a look at a new special report on small biotech stocks with big-time potential to save lives and deliver massive profits. You can find it right here.]

The Good News About the Facebook IPO

The good news is overwhelming if you're Mark Zuckerberg, any of the company's founders, executives, or venture capital backers, many of whom own Facebook stock (Nasdaq: FB) at a dollar a share.

FB is causing its own IPO hype, partly because it's the largest IPO in U.S. history, in terms of the value it puts on the company, which hit $104 billion. However, Visa in 2008 and GM in 2010 will have raised more money on their IPO debuts. (I know, calling GM's IPO a debut is strange to me too.)

But better than that, the company now has a huge hoard of stock to use as currency to buy up companies and technology to advance its "master of the social media universe" status.

The other good news is that the stock is a must-have on many growth managers' buy lists. And a technical glitch on the stock's opening day could have influenced its lackluster debut performance.

In addition to initial institutional interest, in short order, FB-- because of its size-will be added to the NASDAQ Composite and eventually the S&P 500 index.

While the NASDAQ OMX Group wants to include FB as soon as possible, it will have to wait the three months it has set aside for that to happen. As far as being included in the S&P 500, that will take at least six months and will probably require FB's "float" (the number of shares available to trade to the public) to exceed 50% of all shares outstanding.

The IPO has only released about 15% of FB's total shares, but more shares will be freed up after the 4-6 month "lock-up" period that restricts certain insiders from selling right away.

Whenever a company is added to a major index, its stock price usually rises because money managers and index funds have to buy it to keep their portfolios in balance with their benchmarks.

But, be forewarned, the stock won't jump on the day it is added to either index. It will jump on the day of the announcement that it will be added.

The rest of the good news about the IPO and owning FB remains to be seen.

With its new war chest of stock currency, questions abound about what Zuckerberg, who controls some 61% of the voting stock, will do to grow the company in terms of hires, acquisitions and technology advancements.

To me, the good news about owning FB is that it is a giant among giants, and I believe it will change the nature of the Internet, commerce and our lives.

The Bad News About the Facebook IPO

The bad news about FB's IPO is all its hype. And that has me worried for several reasons.

In terms of market metrics, FB came out saddled with high relative price/earnings multiples and high growth prospects. Both of those can turn around in a flash and disappoint investors in a big way.

But on the IPO day, the NASDAQ OMX Group had something much worse to contend with.

The problems that the Nasdaq had sending out electronic trade confirmations in the heat of trading were staggering. (They eventually went "manual" on the opening day of the biggest tech offer ever on the biggest tech exchange in the world... how ironic... manual.)

There's nothing out there, nothing anywhere about who or how many people did or didn't get confirmations or when they got them. There's nothing out there because the exchange panicked, and if thousands of confirms, or tens of millions of shares, were up in the air... well imagine what could happen.

If you wanted shares, didn't get a confirmation that you bought shares, and you put in another offer to buy shares, you would now own double the number of shares you wanted. Imagine you bought at the high, maybe $42 and change, and instead of rising well above that price, the stock fell back to its IPO price of $38, and only didn't fall below that because the lead underwriter Morgan Stanley had to spend billions supporting the shares to keep it from becoming a disaster IPO.

The effects of this technical glitch will wear off, but that means the real problems with the company will start to raise their ugly heads.

As far as earnings, the first quarter of 2012 saw lower earnings than the first quarter of 2011. That's not a good start for the company's debut. And the price-to-earnings multiple is around 100.

Of the 33 companies that have a market cap of more than $77 billion, only two, Amazon.com and Bank of America have multiples of 100 or higher. Amazon is its own story, and Bank of America is so high because its earnings are so low.

Makes you wonder, doesn't it?

Then there's all the hype that accompanied LinkedIn (NYSE: LNKD) and Groupon's IPOs. LinkedIn had a PE (price-to-earnings multiple) of 200 when it came out, rose 31% its first day then fell by one third promptly. Groupon (Nasdaq: GRPN) has had to restate its financials and after a hyped IPO is trading at two thirds of its IPO price.

Makes you wonder, doesn't it?

Then There's the Ugly

So much for the Bad. The Ugly is worse.

It's summer. The markets are in a state of decline. Any macro implosion in Europe (it's already happening) or China (it's already happening) could take U.S. stocks lower and Facebook along with them.

The really ugly scenario is that a massive influx of public investors bid up the stock and have to then dump it hand over fist if a quick drop triggers margin calls or an out-right panic exodus.

My money is patient. I'll be watching the show from the sidelines.

What's important to me is how the stock looks and "feels" in the coming days and weeks. Face it, Facebook isn't going to trade at 200 times earnings any time soon, so don't expect it to double.

And about those earnings. Any time a company warns about its earnings BEFORE they go public, as Facebook did, I'm going to be prudent and not someone's put option.

What will I likely do? I'll look to buy on any big dips, especially the ones that may come after the lock-up period expires and all those billionaires and multimillionaire insiders want to sell and bid up the price of mega yachts and Sand Hill real estate.

Face it: Facebook is going to be a long story. I'm not in a rush to hit it at the top - especially when the top is where the stock started.

Editor's note: All the hype around the Facebook IPO may have you thinking you need to buy shares as soon as possible. But holding off until the dust settles could get you FB shares at a significant discount from today's inflated prices. In the meantime, there are plenty of opportunities for savvy investors - like a biotech "effect" that could double your money in just a few days. You can find out about this massively profitable phenomenon - and even more opportunities - in our new special report right here.

About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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