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When Should You Buy Facebook?

Stocks in this article: GOOG JAMFX GS

"To say this is a big deal, though, is an understatement. It's the big kahuna," he said. "It will lend to a high premium, from every indication. It will probably have an extremely high premium, whether it's where they file at or where they trade it."

Jacob knows a thing or two about the wisdom of waiting to see how a company and its stock perform post-IPO before jumping in. Back in 2004, Jacob's fund did not get in on the Google IPO, although he purchased shares later. That has proven to be a very smart investment, even if he and his fund were unable to land shares at only $85 each.

Jacob's colleague Darren Chervitz, the director of research at Jacob Asset Management, says that he generally prefers to wait until a company goes public so he can get a better sense of exactly what's going on. He doesn't expect to change that philosophy for Facebook, especially when an exception wasn't made for Google years ago.

"There's clearly a benefit to waiting until the lockup period expires. It always pays to wait to see who drops their shares," Chervitz said. "That said, this is a different beast. It's one of those companies that defines how the Internet is. To be an Internet fund and not have a position in Facebook, you have to make a strong case as to why you're not in it. It should have a valuation commensurate with its position on the Internet."

Chervitz notes how several social media companies have come public and have been disappointing for the most part. "Because of the way these stocks have generally performed, the attention and capital was already drying up a little," he says. "Nothing will happen from this IPO that will change anything that's happening in the marketplace. It's a big one-off story. I don't think it's trend-worthy."

Keating also subscribes to the notion that Facebook's valuation will be too high post-IPO, although he says that's a guess as no one will know Facebook's true valuation without the company's financials and stock price.

"Stocks cannot defy the laws of physics," Keating says. "All stocks must be priced on the basis of fundamentals, namely earnings and cash flow. Without knowing the revenue and earnings of Facebook, you have to make a value judgment relative to its peers."

Keating cautions investors not to get swept in the pre-IPO hype of companies like Facebook. He says just because someone loves a company's product doesn't make it a great stock.

"What will make it a great stock is entering in at a fair price point," Keating says. "For the retail investors, it's great to have familiarity by buying companies you know. But you have to buy with an eye toward value and valuation."

To point out the difference, Keating notes that both Google and Apple, arguably the two biggest titans of tech, both trade at earnings multiples below the S&P 500. Facebook, in all likelihood, will have a valuation triple that.

"One can only get comfortable with a premium valuation if there is above average growth potential. That's the question," Keating adds.

Of course, Facebook shares could end up being well worth the investment on the first day if the valuation makes sense. Jacob notes that Facebook really doesn't have any peers when it comes to social networking, making it much different from LinkedIn (LNKD) and Zynga (ZNGA), which came public in 2011.

"Last year, there were always some major risks to Internet companies that came public. They were lackluster and disappointing," Jacob said. "In this case, for Facebook the only major risk is execution. When that's you're biggest risk, it's an enviable position."

-- Written by Robert Holmes in Boston.

>To contact the writer of this article, click here: Robert Holmes.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
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