5.21.2012

On Facebook...

I guessing that a lot of the newly-minted millionaires hanging out around San Francisco over the weekend didn't let it bother them too much, but the Facebook initial public offering (IPO) didn't go so well on Friday.

This wasn't entirely unpredictable. Despite movies being made about it and its Live platform serving as a stop on the virtual campaign trail, the company does not make as much money as its IPO valuation would suggest it does based on any theory of investing I am familiar with. Indeed, I noted nearly a year ago in this article (particularly in the comments) that the numbers being assigned to the company in private sales appeared to be a little (even incredibly) overheated based on the limited revenue numbers that had then been made available.

In addition to valuation issues, there were numerous price revisions in the lead-up to the sale, a greater number of shares were floated than anticipated, and, in a lightly ironic twist, technology issues created delays in trading. However, veteran market watchers will have anticipated the last minute glitches that occurred. And, it was clear that some investors were very keen to get in on the action, despite what anyone was saying about valuation.

Readers might have noticed that all of these data points are rather jumbled, and that the picture they paint is less than clear. So what to make of all of this often at-odds information? Most correctly anticipated that Friday was going to be complicated no matter what, and in that sense, it was a self-fulfilling prophecy that didn't disappoint. In any case, what happened on Friday is probably not indicative, one way or the other, of whether Facebook will be a good stock to own.

That said, there is some information from the day that could provide more concrete signals for those looking to the future. For example, the fact that banks had to come in and prop up prices indicates that strong demand that investment TV was discussing ahead of time never developed. To the extent that shares did get hot (indicated by NASDAQs issues in getting the day started and intra-day trading in the mid-$40s), this demand was most likely coming from retail investors, not institutional investors. In other words, the lack of demand late in the day would seem to be a negative signal from those who have had the best opportunity to kick the tires.

During the next two weeks institutional investors who have control of big dollars and didn't seem too excited on Friday will likely exert far more influence than glory seekers over share prices. This time period which will loom large in determining the near term outlook for Facebook shares. In a scenario which could give new meaning to the term 'facebook stalking', the investing world will certainly be watching...

UPDATE: Well then...

2 comments:

  1. Dear Readers,

    This post underwent a few revisions since I first published it. None of these had to do with tone, but more the fact that first edition didn't really make the point I was trying to make very well. Chalk it up to a caffeine deficit.

    I hope I have remedied that deficiency in the interim. However in case my writing is still unclear, my point is that Friday was marked by confusion and that the next week or two of trading is what will provide the real signals for traders.

    What trading is telling us today (11% off IPO price, 25% off highs) is that the company was overpriced in the lead up to the IPO, and that shares are reflecting this now.

    JS

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