05/21/2012 04:02 EDT | Updated 07/21/2012 05:12 EDT

Why the Facebook Faceplant?


It is said that the average American spends hundreds of hours per year on Facebook. Now the company has gone public, it is quite possible that investors in the stock might spend the same amount of time figuring out whether they did the right thing.

With much fanfare the amazing dorm room creation of young Zuckerberg hit the trading screens in a delayed opening on the NASDAQ Friday morning, after the 421 million shares in the IPO were priced at $38 a share. At $40, which is where the stock was trading at the time of writing, Zuckerberg's personal net worth was just under $21 billion. Not bad for someone who founded the company just eight years ago; it represents about a fifth of the company's market cap.

Bringing the largest tech IPO to market in history at a time when global markets are still fraying at the edges took some guts and played off two factors -- the perception by investors that tech offers some insulation against the garbage heaps of debt in Europe, and that there was significant retail interest in the deal. After all, when close to a billion people around the world are using Facebook one might imagine there would be a fanciful desire to hold some of the company's stock in a portfolio.

Unfortunately, the IPO was not without its critics and the split opinion was evident in the initial trading volatility. Concerns range from the stock being simply overvalued to the decline in revenue the company suffered in the last quarter. Clearly, a private company can get away more easily with one or two off quarters; but with Wall Street at the table, there will be a greater scrutiny of results, the outlook for revenues and earnings, and ultimately the ability of senior management to deliver a continued growth strategy.

The more macro-orientated investors out there will also take the view that this mammoth issuance of cloud-dwelling stock could mark the end of the latest resurgence in technology stocks. I would disagree, as the sector has been coming off the boil for a few weeks now, but it does beg the question of whether negative psychology could send the sector even lower should Facebook stumble out of the gates.

At a minimum, investors do need a reality check. At its current market cap, Facebook is about half the size of Google -- a company which was born into the public market around about the same time as Zuckerberg gave us those annoying friend requests. Google raised close to $2 billion from that offering, but it delivered on revenue and earnings, which allowed it to become one of the most expensive tech stocks out there (trading at north of $600 even with the recent market pullback).

Analysts estimate that for Facebook to mirror this performance, its market cap would have to rise to close to $1 trillion in the same eight year time period. That's a pretty tall feat given that even Apple only commands a market cap of half a trillion and it doesn't have to rely on advertising to turn a buck.