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Facebook IPO Hype

Buy When the Sky is Falling

Written by Ian Cooper
Posted May 18, 2012

“Surprise state is no. 2 U.S. oil producer,” blared a recent Associated Press headline.

“An unexpected state barrels past Alaska and now trails only Texas in crude production.”

That state is North Dakota, the very “unexpected” oil-producing state we've been talking about for the last umpteen years...

The same place that has returned hundreds of thousands of dollars in profits for our readers for years on end. 

I was all set to bash the press for being late to the party, but then I received this note from a reader in reference to my Facebook IPO article of last week:

Ian, you're an idiot.

Anyone with half a brain will buy shares of Facebook when it IPOs. It's a guaranteed winner.

But you're buying Groupon [in Options Trading Pit] and Zynga instead?

When your recommendations blow up in your face, and Facebook explodes, I'll be asking for my money back.

Groupon is a garbage stock stuck in a downtrend. It's over for that stock... over.

I found it quite amusing. Because as much as I love fan mail, I love the hate mail even more.

Shortly after I received that note in my inbox, Groupon would rocket from $10 to more than $15 in less than five days — returning more than 70% and 196% gains in less than four days for my options readers.

Groupon chart 051712

I have yet to hear back from my critic.

As for the other recommendations noted in that Wealth Daily article:

  • Zynga (NASDAQ: ZNGA) ran from less than $8 to close to $9.

  • GSV Capital (NASDAQ: GSVC) ran from $16.25 to close to $19.

  • Firsthand Technology (NASDAQ: SVVC) ran from $27 to more than $30.

  • And the Global X Social Media Index ETF (NASDAQ: SOCL) is up marginally so far.

Even our First Trust IPOX-100 Index (FPX) December 2011 trade has rocketed from $23 to $29.

These are the only Facebook-related trades you want to own going into today's IPO.

Don't Buy the Hype

As a mere retail investor, we'd have to duke it out with the Big Boys in a volatile session.

I'm not willing to risk my money — or your money, for that matter — in the first few weeks of its existence.

Paying 99x earnings is insane. The initial gap could be insanely high.

And if the stock drops as fast as it goes up on the first day, none of us will be surprised.

The glitz of the social network has worn off for me, and I wonder if that will be true for millions of other users.

The business is real — nobody is contesting that. And it's generating great revenue ($3.7 billion in 2011).

But I still can't wrap my brain around a $100 billion valuation.

Facebook is already bemoaning revenue pressures and there are concerns about slowing growth and sky-high valuations.

Profit margins may have peaked.

Users aren't trusting of Facebook...

General Motors has already pulled $10 million in advertising, suggesting even GM doesn't have faith in Facebook's operating platform.

According to

Click-through rates are much lower on Facebook than they are on the internet generally, or on Google, according to WordStream (which manages search ads on Google and thus has a conflict of interest):
Facebook: 0.051%
Google: 0.4%
Average: 0.1%

Worse, CEO Mark Zuckerberg doesn't seem to understand that making profits should be the primary goal for a public company, not a secondary...

"We don’t build services to make money; we make money to build better services,” he says.

Look, I've seen and called many bubbles in this crazy market, and I'm telling you to stay away from this stock.

It's over-hyped.

I'll look to buy it when the sky is falling.



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