Friending fever is about to hit Wall Street!
On Monday, multiple sources reported that Facebook is planning its initial public offering (IPO) for the third week in May.
It's rumored that the social networking giant plans to raise $10 billion. That would make it one of the largest IPOs ever. It would also make Facebook one of the most valuable companies in the world, with a market cap of about $100 billion.
Talk about some serious hype!
Whatever you do, though, don't buy into it. Instead, I recommend you avoid the Facebook IPO like the plague.
Here are the three most compelling reasons why…
Social Media Flops on Wall Street
The trend is supposed to be our friend on Wall Street. And considering that 19 social media IPOs debuted last year, before we even bother dissecting Facebook's fundamentals, we should at least see how they performed.
In two words: Not good!
Kevin Pleines of Birinyi Associates found that 82.4% of last year's social media IPOs are now trading below their opening day prices. And 57.9% (or 11 out of the 19) are trading below their offering prices.
Two of the most notable flops were Zynga (Nasdaq: ZNGA) and Groupon (Nasdaq: GRPN).
The former traded below the offering price on its first day of trading. As for the latter, it zoomed 55.7% higher on the first day of trading. Within weeks, though, the stock collapsed to trade below its IPO price of $20 per share.
Of course, I warned you about both IPOs well before they hit the market (see here and here). So I guess the trend is in my favor!
In all seriousness, though, the reasons to avoid Facebook's IPO extend beyond Wall Street's poor reception for social media stocks as a group…
Slowing Growth Kills Stock Prices
When it comes to investing in IPOs, we're investing in the future of the company. And if the company can't keep growing, our investment is doomed.
One thing I can guarantee is that Facebook can't keep up its torrid growth.
Case in point: In about four years' time, Facebook's user base went from 66 million to 800 million. If Facebook grows at the same rate over the next four years, its user base would hit 9.7 billion.