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If Facebook's IPO goes south, social, tech markets could take a hit

With unresolved issues on mobile, advertising and its hoodie-wearing CEO, Facebook still faces challenges

May 17, 2012 02:17 PM ET

Computerworld - With Facebook's initial public offering creating such a frenzy of interest, there's an important question to be considered: What happens if tomorrow or next week or five months from now, this investment goes south?

"There is such a massive anticipation for this IPO that any stumble by the company, in terms of its strategy or its earnings, could lead to massive losses very quickly," said Andrew Stoltmann, a securities lawyer with Stoltmann Law Offices in Chicago. "Every IPO involves risk, but given the lofty valuation on Facebook, it involves even more risk."

With Facebook expected to launch its IPO on Friday, anticipation is reaching a fever pitch.

The social network company has about 900 million active monthly users. According to Experian Hitwise, one in every five page views in the U.S. was on Facebook, and this one social networking site has received more than 400 billion page views this year in the U.S. alone.

Many potential investors have their own -- or their kids' -- experiences with the site -- playing Words with Friends, keeping track of college roommates, posting updates about family vacations and videos of softball games.

Meanwhile, the social networking company has taken a few hits in the past few weeks that might give prospective investors pause.

An Associated Press-CNBC poll released this week found that three of every five Facebook users have little or no faith that the social network will keep their personal information private. The survey also found that half of Americans say Facebook is a passing fad.

Industry analysts were also troubled with Facebook's inability to generate revenue off its growing number of mobile users. Questions also arose during the company's IPO roadshow about the level of maturity of Facebook CEO and co-founder Mark Zuckerberg, 28, and whether he had the skills to lead a major public company. There was also criticism of Zuckerberg for showing up for a presentation to a buttoned-down group of high-powered investors wearing jeans and a hoodie sweatshirt.

The biggest strike may have been Tuesday when General Motors, one of the country's largest advertisers, pulled out of a $10 million advertising deal with Facebook. The auto maker concluded that its paid ads on the social network were ineffective in driving more business.

However, none of these incidents stopped Facebook from moving to increase the price range of its stock from $29 to $34 per share to $34 to $38.

The new range could boost Facebook's valuation to more than $100 billion.

That massive valuation is causing some concern.

"The biggest thing that creates the largest risk for investors is the outsized expectations," Stoltmann said. "I would say it's at least 50/50 for there to be a big run up and then a price slump... The IPO could open very hot, but there could be thousands of investors who lose massive amounts of money."

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