Facebook IPO: Will the Frenzy Fuel Share Prices?

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Facebook IPO: Will the Frenzy Fuel Share Prices?
Is Facebook worth $75-$100 billion of excitement?

By Bob Stokes
Fri, 03 Feb 2012 17:30:00 ET

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About a year ago, a private sale of Facebook stock had the firm valued at $60 billion.

The March 2011 Financial Forecast noted "...social networking websites moved from a cultural phenomenon to a Wall Street rage."

Indeed, Wall Street is "raging" over Facebook's February 1 initial public offering. The firm's value is now estimated at $75-$100 billion.

Facebook plans to raise at least $5 billion selling stock to the public this spring. It's expected to be the biggest Internet IPO ever, "dwarfing" Google's 2004 offering.

The Facebook frenzy may, for now, breath new life into other recent internet IPOs like LinkedIn, Groupon and Zynga.

Yet last year was a different story for IPOs:

"In 2011, the average U.S. initial public offering has fallen by 9.9% in its first six months of trading. IPO stocks made a closing peak in February, three months ahead of the overall market and coincident with a top in the countertrend rally in financial shares. Then the Bloomberg IPO Index, which includes shares of companies in their first year of public trading, declined...to a closing low on October 3."

Financial Forecast, Dec. 2011

Please take a look at the chart below (wave labels and forecast removed):

Should investors be concerned over too much Facebook excitement?

Consider that the IPO filing comes after the S&P 500 has doubled since the March 2009 low. What's more, Facebook derives 85 percent of its revenue from advertising (Wall Street Journal online, Feb. 2). If the economy turns weaker, advertisers will likely cut back.

Also realize that this level of IPO excitement often accompanies rally tops, indeed, even landmark tops. Remember the craving for internet shares in 1999-2000?

The just-published February Financial Forecast observes: "The conditions that accompany major stock market tops are falling into place." And those conditions go way beyond the enthusiasm for Facebook stock.

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Tags: Elliott Wave Theorist, financial forecast, investor psychology, risk appetite, S&P 500, sentiment, Wall Street

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