5.21.2012

Facebook Market Performance

It is amazing how the stock market manages to get people suckered into bad investing choices every single time. I had told some of my friends to stay away from FaceBook stock at least initially. But they still bought the stock at $38 and just of its second day of trading it has lost almost 11%. 

What surprises me is that why people could not see this coming? Many "experts" in the media contributed to the hype. MySpace is a classic example of how quickly internet community can get tired of a social platform. Most of all GM pulling out should have been a major hint!


Insiders Big Dump
The problems with this IPO were evident from the beginning. For one, half of the shares being offered for sale in the IPO were the shares of the insiders. This is highly unusual as in most IPOs the insiders are precluded from selling for at least 180 days. This helps to prevent the kind of pump and dump we saw here. The insiders unloaded a ton of shares at the IPO prices and the stock is already worth more than 10% less. 


The Underwriters
Besides the insiders dumping their stocks, Morgan Stanley was blatantly manipulating the price which in normal circumstances could have been a bases for SEC investigation. The underwriters were buying shares on the first day of trading to artificially increase demand and prop up the stock price to try and keep their big investor happy. In the mean time, any retail investors who bought stock on Friday at the open have now lost 10% of their investment in just two days. 


The IPO
Facebook made out wonderfully on this. They priced the IPO at basically the highest possible range and got all the money they could. The fundamental financials of the company did not support the IPO price and that was readily apparent to any savvy investor. To go public with a P/E of over 50 is just completely absurd, even for a "growing" internet company. Neither the growth rate or the earning supported the valuation and the rapid price slide proves that out. 


NASDAQ Delay
To try and blame the 30 minute delay in the start of trading due to computer issues at NASDAQ for the stocks pitiful performance is a joke, it had absolutely nothing to do with it. If I was the retail investor who has lost money like this, I would have demanded a full scale investigation of this entire IPO. Perhaps Mark is not a college boy feeding his website hobby as many in business community had perceived him to be.


So who did this benefit?
An IPO is for the company's current shareholders [who are selling stock] and the company's operation's benefit [because money was raised to fund operations], not the investors who buy shares in the open market after the IPO. If you look at the IPO in those terms, it was a success!

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