Why IPOs Are Problematic, and Why Facebook Is "Overpriced"

Since going public last month, Facebook has gotten intense media attention, even as it's struggled out of the gate. Now trading more than 20% lower than its offering price, is it a bargain worth buying?

In an hourlong interview last week in Washington, D.C., I put that question to Eddy Elfenbein, who writes about stocks at Crossing Wall Street. Elfenbein, a long-term, fundamentals-oriented investor, was named by CNNMoney as "the best buy-and-hold blogger" on the Web. (Check out his free newsletter here.)

You can view our conversation here (run time: 2:29), or see the transcript below:

Brian Richards: Let's drill down on some specific stocks. Facebook is all over the news, all over the media, and really, with hundreds of millions of users, everybody's familiar with the product and has been asking about the stock. It was at $26 as of the close last night. [Editor's note: Facebook closed near $30 on Friday.] I'm not sure what it's trading for right now, but do you like Facebook? Do you hate Facebook? What's your view on it?

Eddy Elfenbein: [laughs] I do not like Facebook as a stock. First, investors need to understand something about IPOs -- IPOs are a rather dangerous area because that is one of the times where existing shareholders and new shareholders about to come onboard are in direct opposition. It's not pleasant, and this is what can happen. And basically there's an implicit message from any company going public, that they're saying, "Our stock is overpriced." Not by some amount. That's why they're selling shares.

In the aggregate, IPOs have not been good performers in their first few months. But the company is out to make a profit so I don't follow them. I think Facebook in this case was very ill-served by their bankers and I think they pushed for too much than the market could bear and now there's a backlash. I know Facebook is overpriced. I thought it would take a lot longer to fall. I would say Facebook reasonably should be in the mid-teens right now, so it still has a long way to go in my opinion.

When I'm looking I'm extremely discriminatory as far as investing. I look for very, very good bargains. I never take a risk I don't have to. That's one of the keys to investing. So, Facebook gets a lot of attention. If something gets a lot of attention almost by definition I'm not going to be interested in it.

For more from my interview with Eddy Elfenbein, click here, or check out his site, Crossing Wall Street.

At the time thisarticle was published Fool.com managing editor Brian Richards does not own shares of Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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