To invest or not to invest? That is the question, surrounding the news of Facebook’s upcoming IPO.
The argument, of course, is reminiscent of the Dot-com IPO’s of the late 90’s and the hype involved with the Dot-com bubble.There is fear that Facebook is a new Dot-com, and that is what’s keeping many investors at bay. There are two key differences in this case that will make Facebook’s IPO a better offering.
The Facebook Difference
The first difference is the company itself. With IPOs — as with all stocks — you want to see strong earnings. Facebook (FB) is not a brand new company. According to its initial filing with the SEC, the company had net profits of over $1 billion in 2011. $1 billion. Again…$1 Billion dollars. This is not some great idea that someone has that they have sold to investment bankers that they think will work. Facebook has over 850 million active users, and by the time they go public, they are likely to have over a billion active users. This fact alone makes this IPO different from many out there. Facebook isn’t just a solid company, it is dominant. It has a viewership that CBS, NBC and other major media channels can only dream of. Has it peaked? Is there any growth left? As for users, the argument can be made that its explosive growth is done, but as for earnings growth, it has just hit the tip of the iceberg. I don’t think Facebook has truly figured out how to optimally cash flow its viewership. When it does, Facebook will really start to see earnings heat up.
Timing of Facebook’s IPO
The second reason this IPO will do better is due to timing. The IPO’s from the Dot-com bubble were launched at a time when the economy, and thus the market, were reaching a cyclical top. This frenzy drove stocks to ridiculously high prices. When the economy slowed, these stocks earnings growth dried up (if they had earnings at all) and the ensuing drop in equity prices created pain for any investors contemplating investing into a stock soon after it has gone public. That is clearly not the case this time around. The economy is not at a top, but actually bottoming out and showing signs of improvement.
The main thing to remember with IPOs, is buying at the right time is crucial. It may be tempting to jump right into a stock on the day it goes public. But since the stock has no trading history a better strategy is to wait until it’s been trading for a while and forms a base or other pattern that offers a good buy point. Also, the bases formed by IPOs are occasionally shorter than what you’d look for in a stock that’s been trading for some time.
Options Trading Strategies
Another key reason that will help you this time around will be the use of options trading strategies like the collar trade. The options instruments can help you approach an IPO that has uncertainty, and do so with much more confidence. This of course means that you need to be patient enough to not enter the stock until it has options available to use. That may not happen the first month. In fact some companies spend several months before the demand for options is available to those stocks. In some cases companies won’t allow options. Berkshire Hathaway A Shares are an example. With Facebook, I expect that options will be fast. Google (GOOG) traded options the day after it went public. Considering this IPO is arguably the most anticipated IPO in recent history, options should come quick.
Zynga (ZNGA) was one of those cases where you have benefited by not jumping in right when the stock opened for trading. Traders needed to hedge their trades with options, and ZNGA needed some time to form its base, as mentioned above. I expect Facebook (FB) to be similar because there is a lot of hype surrounding the stock. It may not have the pullback like ZNGA, but that doesn’t make my job of controlling risk any less important.
Facebook’s IPO is coming so now what?
Options strategies like the Collar Trade, are crucial for controlling risk in this market. Not only do collar strategies provide for leverage and cash flow, but they also help you control risk. Options allow you to profit from potential IPO’s like Facebook, but do so without risking the drastic moves that many remember from the first round of Dot-com IPO bubbles.
OptionsANIMAL CEO and Founder