Facebook IPO Could Stand in the Way of Sell-in-May
Facebook's blockbuster initial public offering could be coming at just the right time for markets — when investors are preparing for the seemingly annual ritual to sell in May and go away.
Stocks have been volatile but ultimately have gone nowhere in the past month, following a strong rally off the October lows.
With investor complacency setting in and the time seemingly perfect to book gains and get ready for vacation, the Facebook IPOis considered a primary hope to keep the market from slipping into summer slumber.
"Clearly, it's going to be the biggest IPO in a while, and one of the knocks on this market has been the lack of IPOs," says Ryan Detrick, senior analyst at Schaeffer's Investment Research in Cincinnati. "It all comes down to a lack of trust and lack of confidence in the market, even though we've had a pretty good rally."
Since the Dow industrials broke through the 13,000 barrierin early March, the market has posted a modest loss as investors have looked for a new catalyst to spur buying.
At the same time, the climate for new offerings has been tepid.
There have been 60 IPOs offered in the US, totaling just shy of $10 billion so far in 2012. That's 12 fewer total deals and a staggering 67 percent drop in total value from the $30.4 billion posted for the same period in 2011, according to Dealogic. Globally, the decline has been comparable.
One bright spot, though, is that technology deals are on par with 2011, giving hope that the sector can provide a rising tide.
"The Facebook IPO potentially could open the door to other IPOs and some more confidence toward the stock market," Detrick says. "In the bigger picture it would be nice to talk about some positives after all the negatives."
The offering is expected to launch in May, generate up to $10 billion and reflect a valuation for the 8-year-old company in the $100 billion range.
Should Facebook meet those gaudy metrics it would be hard to imagine it not boosting the market, particularly the Nasdaq tech gauge where it will be listed. Tech stocks have led the market this year, with the sector up nearly 21 percent on the Standard & Poor's 500 heading into Friday trading.
"This offers hope that we're going to see more IPOs, especially in social networking. Obviously, investors will be looking beyond Facebook," says Peter Cardillo, chief economic strategist at Rockwell Global Capital in New York. "An increase in IPOs suggests that corporate America is confident in the economic expansion."
The Facebook IPO follows a handful of other high-profile offerings in the field, primarily Groupon , LinkedIn and Zynga.
To be sure, some worry that the Facebook move may not signal merely a pinnacle in the space's progress but also a top in a potential social networking bubble that ultimately could weigh on the market.
"In hindsight people might look back and say once Facebook became public it was more of an identification of all the social media companies that have come out and are trading at incredible multiples," says Gary Hager, president of Integrated Wealth Management in Edison, N.J. "There's a frothiness to the social media side that is going to have its comeuppance soon."
Indeed, LinkedIn — a kind of Facebook for professionals — has seen its shares soar 75 percent just since December, and the company is trading at nearly 900 times earnings. Zynga and Groupon have turned in performances far less stellar.
"One would expect that (the IPO) would be done smartly, efficiently and the IPO itself will go OK," says Rick Bensignor, chief market strategist at Merlin Securities in New York. "Whether that becomes the catalyst for a significantly higher market move, I would tend to think less so — that it becomes the catalyst for where the market would peak."
The IPO's timing, CNBC reported earlier this week, likely will be dependent on the Securities and Exchange Commission's review of the company's $1 billion bid for Instagram, an upstart company with virtually no revenue that developed a photo-sharing application for users.
Once that hurdle is cleared, the market can get ready for what likely will be the largest offering Wall Street has ever seen.
"Hopefully this will get people excited about the market," says Detrick, of Schaeffer's Investment Research. "There's a lot of concern about a selloff in May. That could be the time frame that saves us."