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Comments from Tim Keating of Keating Capital added to this update



) -- Let's be honest: For all the hype surrounding the


IPO, chances are you and nobody you know is going to be able to get shares in the offering.

The sad truth about hot IPOs is that retail investors rarely get a chance to get in on the offering. With Facebook's initial public offering set to raise only $5 billion, compared to the social media giant's valuation of roughly $100 billion, it's a small slice of the pie that's being made available. That will make it extremely sought after when the company finally comes public, and retail investors will no doubt have the hardest time finding access.

"It's a supply and demand equation," explains Tim Keating, CEO of Keating Capital, which operates a closed-end fund dedicated to pre-IPO investments. "When you have an incredibly popular name like Facebook, there's a small allocation to retail."

Keating says that in a typical large IPO, 90% or more of the offering is allocated to institutional investors. For argument's sake, if the allocation is 10% for retail investors on a $5 billion IPO, that's only $500 million available for retail investors.

"That may be taken up by the underwriters' own clients," Keating points out. "If you're not a client, you're probably out of luck."

Goldman Sachs

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already knows how popular the Facebook IPO will be. A year ago,

Goldman caved to "intense media attention"

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and decided against a decision to offer Facebook shares to its U.S. clients. That came after reports the Goldman was requiring clients to make an investment of at least $2 million to get a stake in Facebook.

If you need a reminder of what the initial frenzy will be like, think back to when


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first went public in 2004. Google offered only 19 million shares of common stock at $85 a share. The stock opened on its first day of trading, Aug. 19, at $100. Within a year, shares of Google tripled. By the end of 2005, shares were above $400.

With Facebook set to eclipse Google to become the largest Internet IPO in history, it stands to reason that Facebook shares will follow a similar trajectory to Google's stock, right? And that means investors who missed out on the IPO should think about buying shares as soon as they can get their hands on them, right? Well, not everyone is buying into the Facebook frenzy, at least not yet.

Ryan Jacob, CEO of Jacob Asset Management, is the portfolio manager of the

Jacob Internet Fund

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, which invests only in Internet and tech companies that Jacob thinks offer long-term opportunities. Despite have "Internet" in his fund's name, he's not immediately jumping on the Facebook bandwagon, noting an important lesson that is often forgotten by investors who buy into hype: Price does not equal value.

"You can't be completely blind to valuation, especially with an IPO," Jacob said Friday by phone from his office in New York. "We may own Facebook, but we may not own it right away. To be honest, there are some major Internet players we don't own, so we'll be taking a very close look at the IPO and then we'll make a decision."

Jacob points out that stocks are price to sell in IPOs. While that doesn't mean investors shouldn't buy any IPOs immediately, Jacob says it simply means investors must be careful in evaluating the investment. With so much hype and investor interest in Facebook, Jacob says investors will need to be extra cautious.

"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


, 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





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, 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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