How To Purchase Facebook IPO Shares If You Decide To

Everyone’s talking about Facebook’s upcoming IPO. Regardless of if you want to invest, this post should help you understand the IPO process, find out if you’re qualified to purchase Facebook shares, and provide some opinion on the valuation.

To become more familiar with the offering, immediately check out the most recent SEC S-1 filing and the road show video. Focus on the filing, if nothing else check out the: prospectus summary (p. 1), selected consolidated financial data (p. 38), business (p. 84), and description of capital stock (p. 148).

As expected, the video is heavily scripted, biased, and focuses on the potential with their number of users. However, you don’t have to watch all 30 minutes; here’s a link to summarization. Also, if you want to balance out the melodramatic Zuckerburg, glimpse at the Facebook tag on Tumblr.

Facebook’s IPO Process
There are many reason why a company may want to go public, most notably, to raise capital and provide a liquidity mechanism for investors. There are no earnings, cash flow, profitability requirements for a company to IPO (outside of exchange requirements). This means a good IPO candidate can be a new, untested company.

Here’s the Facebook IPO timeline:

  • February 2012: The company files a S-1 with the SEC. The SEC and investors approved of the IPO.
  • April 2012: Facebook chose to be listed on the NASDAQ - getting a pretty sweet deal and will be given the FB ticker.
  • Current Stage: Investment bankers solicit interest from institutional clients during what is called a road show. Right now the price range is $28 to $35 per share. The approximately 337 million shares will bring in $9.4 billion cash at the low end of the range.
  • As early as May 18, 2012: Shares will be priced.
  • Sometime after May 18, 2012: FB will IPO, receiving cash for their shares. Plus, a few of FB’s executives, employees, and relatives will celebrate the NASDAQ opening bell. After which, the shares are open to the public.

The type of IPO auction is important to note. FB will be using the traditional allocation method, while 5 years ago, Google used a dutch auction. This partly decides which retail investors (you and I) will have access to the shares and how shares are allocated.

Participating in Facebook’s IPO
20% to 25% of the 337 million shares could be allocated to brokerage firms like TD Ameritrade, Charles Schwab, E*Trade, or others catering to small investors. Here is the general process to participate:

  1. First thing you should do is call your brokerage house. The brokerage should have an IPO department. This department will first see if your account is qualified, confirm you’ve read the prospectus, and understand the risks. For Charles Schwab, qualifying means having over $100,000 in household assets or having traded more than 35 times in the last year. Sometimes you’ll be asked to fill out an additional IPO form; I know E*Trade does this.
  2. Place a conditional offer to purchase IPO shares. Tell your broker the number of shares you want to purchase and the maximum price per share you are willing to pay.
  3. Once the price is set by FB’s underwriters, everyone has to reconfirm their conditional offer. The window for the reconfirmation is small (sometimes 1 trading day or 8am to 4pm EST) so make sure you check your IPO center and sign up for email updates. You will be able to change the price OR quantity of your conditional offer while the window is open. Remember, this also means changing the quantity to 0.
  4. Distribution of shares will depend on the allocation of shares your brokerage receives, demand for those shares, and finally how valuable you are as a client in terms of length and assets.  
  5. Standard commission rates will apply. You can’t, however, flip the IPO. If you’re planning on selling your shares the first day, think again. The brokerages will be upset and possibly penalize you (refer to your broker’s policy) by freezing your account. Normally, you will have to hold the security for 30 days after the IPO date.

Demand for shares will influence if shares will pop or drop on IPO day. FB is likely oversubscribed, meaning there is high demand and the syndicate of underwriters will not have to support the price. So now let’s talk about one of the factors driving demand, the valuation.

Opinion: FB Valuation
Now that you know if you’re eligible or not, let’s talk about FB’s $100B valuation. Firstly, not many IPOs have been successful (refer to the image).

There is a lot of information and opinions on the valuation. Below are a few points that have influenced my opinion in the recent weeks:

  • There are 2 main sources of revenue for FB: payment integration and advertising. The ability for payment integration has created an opportunity for companies like Zynga to thrive. When you have 3rd party developers building apps, it increases interaction of your platform like it has for Apple. At the same time companies are users to sign-on using FB making the business pervasive like Microsoft. On the other hand, because of the information supplied by users, advertisers can have more targeted campaigns than possible on Google. Both of these have great potential for growth.
  • Zynga and other developers are diversifying onto other platforms. Additionally, many services allow you to sign-on with Twitter instead of FB.
  • It is cheap to start a social network, but costly to run one. More employees, servers, and infrastructure will need to be added in the future, decreasing margins.
  • I don’t like the FB interface. Zuckerburg boasts about FB’s hacker mentality - creating a program with the minimum viable features and letting the user decide if it’s successful. Personally, I think FB needs a much better design. This culture is great when a company is just stating out and the innovative users are excited about the product (see next pt.); however, as the company grows, it should better its products.  
  • As the number of FB users increases, the coolness factor decreases. Many have thought that is the sole reason for $1B Instagram purchase. The market is only going to grow more competitive and so the number of acquisitions will have to increase. That compared with social media fatigue will impact revenues and time spent on FB. On the other hand, the more people on LinkedIn, Twitter, and Tumblr the better the service since people want to connect, follow, and increase their exposure. The more friends you have the less you can interact with each of them and FB is a personal network first.
  • I believe the valuation is too high. You can test your own valuation using this FT valuation tool. Refer to the table below for my logic:

          

  • FB had an awesome move made about the founder and the company: The Social Network. This matters because the glorification of the company has an impact on the oversubscription of IPO shares. People who have never bought an IPO before, will seriously think about participating in this one.
  • Users are important to FB and it’s priced at $1.11 per user and around $1.50 per active user based on a $100B valuation. That is much less than the $33 per Instagram user. Plus, the market potential outside the US is still great. Even in the US, young people create accounts and use them almost as soon as their born.

All in all, I may participate in the IPO if I’m confident the pop on the first day of trading will be large enough. For that to materialize, the shares would have to be priced at the very bottom of the range. At the same time, I believe the shares will drop significantly in the short term (60 days or less) presenting a buying opportunity well below the IPO price. Furthermore, in the next five years, the market capitalization has the potential to reach Google’s size.

I’ll be posting my thoughts and final decision on Twitter as the IPO date moves closer. Tweet me and let me know what you think. Also, read the investment disclaimer.

*Update 5/15*: Shares are 25 times oversubscribed according to a recent NYT Dealbook article. Subsequently, FB is raising their price range to $32 to $38.

Additionally, Bloomberg predicts online advertising to grow to $10 billion within the next year. Plus, FB is planning on adding diversity to their company by searching for female executives. The changes in management will be announced after the IPO.

Finally, today is the last day to decide if you would like to purchase IPO shares.

Q:Nice blog. You say you passed the series 7 and 63 during undergrad. Can I ask how you did that? I thought you needed sponsorship? I'm trying to do same thing, but don't have job in finance.

kkjc56

That’s right, you would need to be sponsored by a company (where you work) to take the series 7. On the other hand, you can take the series 63 on your own.

First, you should decide if you want to take the test.

  • Will it help your career? All careers that require a series 7 will sponsor, train, and maintain the license on their dime so it isn’t a requirement to land the job.
  • Will it help you during recruitment? Depends on how you spin it. Focus on the ingenuity and persistence it took to get sponsored.
  • Is it worth taking the time to study for it? Think about if everyone in the career you choose has the license. If they do, you may want to get a leg up by passing the test. Honestly, it is not impossible to pass with 100 to 200 hours of studying.

If you decide you still want to take the test, here are some ways to get sponsored:

  • Ask a family friend who own their own financial planning or insurance company to sponsor you. Pay them back the roughly $500 fee.
  • Intern unpaid at a place that will sponsor you. Since you won’t be needing the license as an intern, you’ll have to convince the management.
  • Land a full-time job in the industry and the company will take care of the rest or you can ask them to sponsor you.

Good luck and remember, the series 7 is usually not a requirement to land a job directly out of college.

Investing and Trading Stocks, Options, Bonds, and Everything Else

                                

Like a 16 year old getting excited to take their driving test, as soon as I was 18, I opened my first brokerage account. Since then investing and trading have become my favorite hobby.

During my undergrad, I earned the NASD Series 7 and 63, Bloomberg Certification and started studying for the CFA. None of which proved helpful for what I’m working on right now.

You can see all of my posts on trading and investing by clicking HERE. Or you can take a look at a few of my favorite:

Disclaimer: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Additionally, this material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. The information may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

Check out this fun lawyer disclaimer before reading any of my posts in this section.

My Top 10 Stock Picks for 2012

                                        

One of my favorite blogs, The Big Picture recently complied a list of Bank of America’s, Barron’s, CNN Money’s, Deutsche’s, and The Streets top 10 stock picks for 2012. Since have have an average of 58% cash in my stock account, IRA accounts, and charitable trust, I decided to create my own list, diversified by industry. However, instead of just listing my picks, I decided to add a little commentary.

  1. Basic Materials - Alcoa (AA): This stock lost 44% in 2011 making it one of the worst performers, mainly because of discouraging economic data and thus decreasing demand for aluminum. The stock trades at about 8.7x free cash flows and is a cyclical long term play. Possible time to purchase: Mid 2012, when the economy shows signs of recovery.
  2. Capital Goods - Caterpillar (CAT): CAT is a solid company which has produced higher revenues even in uncertain economic times. They have very little leverage and high cash flows. It is no surprise the company is about 19% away from its 53-week high. I would be a buyer at around $85.
  3. Energy - China Petrol (PTR): Oil prices are on the rise. In 2012 I think supply will increase and demand will remain consistent. That said, PTR is poised for higher production with increased profit margins. PTR is 90% owned by the Chinese government and would be subject to political and international risks. I would invest at around $120 per share.
  4. Energy -Dorchester Minerals (DMLP): This stock is gaining higher volume. If you think mining and drilling will increase in the US, this stock is a possible investment. With a 7.12% dividend yield, this mid-cap stock is at a reasonable valuation currently. 
  5. Financial -  Short Goldman Sachs (GS): With trading departments, the greatest sources of bank revenue, shutting down to comply with the Volcker Rule, GS is dependent on M&A revenues. The European Union and America are projecting slowdowns along with the rest of the world. I think analyst estimates are too high at this moment and the only people who should own the stock are employees required to.
  6. Financial - Blackstone (BX): On the other hand, Blackstone is a beast! Raising record levels of funds and with interest rates that continue to be at record lows, financing companies and finding distressed targets shouldn’t be very difficult. I’d buy the stock if it dropped to $11.
  7. Technology - Apple (AAPL): I’m predicting a one time dividend from Apple this year. Additionally, I think IPhone, IPad, and Mac sales will continue to grow internationally and am looking forward to Apple TV. That said, it is an expensive stock. Like I stated before, I owned the stock, however, recently sold it for tax purposes. I would happily get back in at around $400. 
  8. Technology - Google (GOOG): I think Google will breakout. Yes, they fail with Google Plus, but they are improving their Android system and YouTube monitization. Personally, I view the technology as speculative since there is still so much to be realized. I would pick up a few shares right before earnings on January 19th and hold it for the rest of the year.
  9. Financial - Wells Fargo (WFC): simple culture and simple business model. Many times, when analysts think of solid banks they list JPM and WFC. I think the culture at JPM is great under Jaime Diamond, however, the business is complex. I would be a buyer after the next couple of weeks depending on events in the Euro-zone and US. Year end, I think the price target will be $42.
  10. Consumer Non-cyclical - Diamond Foods (DMND): This stock was beaten down by the suicide of an executive, a walnut accounting audit, and a delayed Pringle merger. Nevertheless, I think this stock has been beaten down too hard and predict a great upside this year. I’m planning on buying it very soon.

I plan on reevaluating each of my picks periodically. In the meantime, you can follow the stocks’ progress on a public Investopedia account, game name: Cap Concept. I included the S&P 500 and NASDAQ ETFs so that we can measure the alpha.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Do your own research before making investment decisions.

My Bank of America (BAC) Options Trade Story

I have been investing in the market ever since I turned 18. My first trades consisted of AAPL and RIMM. I bought them because I knew there product and saw their popularity sky rocket across my friends and place I visited. The trades ended up profitable, and I was hooked on the markets.

I made the novice mistake of buying high and selling low and ended for a loss during the 2008 financial crisis. Nevertheless, the years that followed have been good to me. I have learned my lesson, improved, and I can’t complain. Recently, I finished my intensive investment banking internship so I have a bunch of free time and cash. Of course, I decided to do a little trading.

I chose Bank of America since I believed the company to be fundamentally undervalued, the stock had dropped to record lows, and was volatile. A couple of weeks ago I had purchased 25 10/22/11 $7.00 C at $1.15 each. I held it for 2 days and exited at a $1.40. I couldn’t have gotten luckier- this was within 5 cents of the maximum price it was planning on going for weeks. I was content with the gains and decided I would be patient and renter the trade if the option price dropped below .86 cents.

At the beginning of week the options tanked and I picked up 80 10/22/11 $7.00 C at $0.85. This time the cost basis of the trade was much higher. The stock quickly sunk to $6 a share and the options to $0.64. I was cool. There was little to worry about since the fundamentals hadn’t changed; but when the stock shot up the next few days, I decided a $0.10 profit was enough and put in a limit order at $0.95. This was a really amateur mistake.

Putting limit orders is usually not my style. The move shows laziness, a lack of research, and involvement on the investors part. Unfortunately, the harm was done and I only profited $0.10 on my trade. Sarcasm aside, the options sky rocketed to $2.03 with news of Warren’s $5 billion projected investment in the bank.

I’m grateful I didn’t loose money on the trade, but in the future I will have to be more focused and disciplined especially when trading options. I will have to remember the Zurich Axioms of trading next time. Hey, maybe I’ll buy a couple of puts on the stock, and at least I still have Apple shares.

What? Steve Jobs quit? He will be missed.

Playing Poker in Las Vegas

“Startups play poker. Managers play chess.”

I have played quite a bit of Texas Hold’em since my introduction to the game during my freshman year of High School. On my phone, I use the Pokerist.com’s Texas Poker application. Last year, almost every Thursday at 7pm, I would meet with a group of majority Asian students with offers in sales and trading to play no limit. When I go back home, I usually play poker with friends while catching up. Playing cards recreationally has been fun. Being big fan of game theory doesn’t hurt; especially since poker’s high stakes, risk and reward probabilities, and bluffing factor make it a challenging game.

Going to Vegas, however, is a whole different game. Having anticipated that I would need to take my game to a whole new level I studied pot odds, pre-flop odds, and in-game odds. Most of my analytical research came from this site: http://www.tightpoker.com/poker_hands.html. Having played thousands of hands in the past, I had a good idea of the expected values already, but the site conveniently organized the probabilities into charts, making easier to elevate my game.

After playing at the MGM Grand casino for slightly over 4 hours I had turned $110 into $1,159.75. I guess preparation pays (maybe even better than banking). The game was very stressful though, I had to make many correct and lucky decisions to earn that kind of money. I feel like I want to take a break from Vegas for at least a couple more years, and stick with house games in the meantime.

In the end, I blew $300 of the winnings on craps and roulette, saving just enough to pay for my hotel room. Vegas was a blast and my friends made it even better, but I couldn’t be happier to go back to work on my startup. I can only hope that the startup grows as fast as my chip stack did before I cash out.