Why the Market Needs the Facebook IPO

Ring the bell, sound the gong, “like” it on a certain social media website. The Facebook IPO is almost here.

After months of hype, Facebook will finally become a publicly traded company this Friday. The stock will begin trading on the Nasdaq under the ticker symbol “FB.” The social network’s IPO goals are historically ambitious.

On Tuesday, the eight-year-old company raised its IPO price range, previously at $28 to $35 a share, to $34 to $38 a share. At the high end, that could put the company’s valuation at $104 billion. The company is expected to raise close to $12 billion in its initial offering, shattering Google’s (NASDAQ: GOOG) 2004 IPO haul of $1.67 billion, which still stands as the record for an Internet company.

Considering that the Facebook IPO could value the company at more than 100 times its 2011 earnings of $1 billion, investor skepticism abounds as the social networker’s debut draws nearer. But there is also plenty of excitement – and with good reason.

Facebook’s IPO is coming at a time when the market needs it most. Stocks have taken a beating over the last two weeks, with the S&P 500 tumbling 5.6% since May 1.

Escalating fears of a Greek default, Spain officially falling into a recession, slow economic growth here in the U.S. and an unemployment rate stubbornly refusing to dip below 8% have all contributed to the recent pullback. In Europe especially, things appear as if they’ll only get worse before they get better.

The market could use a flashy new kid on the block, a record-shattering social media stock that serves as a welcome distraction from all the other depressing financial news items out there. Sure, at 100 times earnings, Facebook is likely to be grossly overvalued coming out of the gates. But a big first-day pop from the stock could at least give some investors a much-needed dose of confidence after a rough couple of weeks.

Facebook’s IPO could also inject some life into what has been a dismal market for Internet IPOs of late. Groupon (Nasdaq: GRPN), Pandora (NYSE: P) and Zynga (Nasdaq: ZNGA) all went public in the last year. Collectively, the three social media stocks have fallen by a combined 100% since their IPOs.

Of course, none of those three companies was profitable last quarter. Groupon and Pandora have, in fact, never been profitable. That’s a far cry from Facebook, which made $1 billion last year.

But perhaps if Facebook has some sustained post-IPO success, it will make public trading a little easier for future social media stocks (Twitter, for example). Maybe the next Internet stock won’t be such a dog after its IPO.

It already appears that Facebook has done wonders for the IPO market as a whole. Since filing its IPO papers with the SEC in late January, 64 U.S. companies have gone public. The 54 IPOs from February through April amounted to the busiest three-month stretch since the fourth quarter of 2010. More important, the new stocks are performing well: The 16% returns year-to-date for IPOs is a distinct turnaround from the 10% losses suffered in 2011 by companies that went public that year.

So in a way, the Facebook IPO has already served a purpose. Whether you decide to actually get in on the Facebook IPO is a whole other issue that we discuss in a special report due out later this week.

What’s clear is that it’s a showy stock receiving almost unprecedented hype. Like Facebook itself, the Facebook IPO is a much-needed distraction in an otherwise tumultuous time.

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