Ok, let’s be honest. There are a ton of reasons why I’m an idiot, but in the interest of time (and my ego) I’m going to focus on just one of them today. (Don’t worry, I’m sure I’ll bring up many more of them in the future).
After my brilliant (but cheezily titled) post last week that tried to warn everyone to use some caution before investing in Facebook on the day it IPO’d, I went ahead and ignored my own advice, bought some shares, and gambled that Facebook would pop.
I was wrong. Spectacularly wrong.
The IPO price was $38, and the stock reached a high at $45 around 11:30am on Friday, May 18, before quickly falling back to $38. The stock briefly got back up to around $41 or $42 before closing up only $0.23 at $38.23. This was very unexpected as most people expected there to be a significant pop in the stock price on day 1.
The real carnage happened after the weekend on Monday, as the stock closed at $34.03, down 10.99% from Friday’s close and down a staggering 24.38% from the high of $45 during the day on Friday.
The only good news is that it turns out my prediction to be cautious was pretty spot on, so at least I have that going for me.
Okay, so let’s try and figure out what does the last two trading days tell us about Facebook’s IPO:
In any case, it has been quite a while since an IPO garnered as much publicity as Facebook and it has been fascinating to follow the mainstream attention it has received. When Facebook releases their quarterly earnings I will likely write another post about the Company to see how they are doing.
Everyone is talking about Facebook’s IPO that is taking place tomorrow. I went to a wedding last weekend and people ranging from my parents to my friends to the DJ (ok maybe not him) were discussing the IPO and whether they should try and buy the stock.
I told everyone the same thing - if you buy Facebook’s stock tomorrow you are doing the equivalent of putting your money on black or red and spinning the roulette wheel.
Now, I am NOT saying that I think buying Facebook stock is a bad idea - in fact, I might buy some tomorrow. What I am saying is that: a) facebook is a risky company to invest in at the current valuation, and b) buying its stock on the day it IPO’s is extremely risky due to what I expect will be massive swings in the stock price tomorrow.
The appeal of getting in on tomorrow’s IPO is obvious - wealthy investors have been trying for years to get their hands on Facebook stock through private stock sales via services like SecondMarket and have been berating their brokers for the past 6 months to get a piece of the IPO at the IPO price, which has apparently been set at $38/share. The IPO Price is the price at which Facebook sells its stock to hedge funds, institutional investors (mutual funds, pension funds, etc.), and the 1 percent (aka high net worth individuals). These stock sales occur before the market opens tomorrow.
For the rest of us poor shmucks who don’t have millions in the bank, there is zero chance of getting in at Facebook’s IPO Price of $38 so we have to wait until the market opens at 9:30 AM tomorrow morning and Facebook starts officially trading on the NASDAQ before we can buy Facebook.
However, since there is so much demand for Facebook stock, it is very likely that Facebook’s stock will open at a price higher (or significantly higher) than the $38 IPO price. And recent data shows that recent tech IPOs have tended not to live up to their initial hype.
CNN has a great article that highlights some of the risks of investing in Tech IPOs.
Of the 31 Internet IPOs held since the beginning of 2011, 22 are currently trading below their closing price on the day they went public. Here’s an even scarier stat: 16 are trading below their offer price.
Now to be fair, these 31 IPOs did pop a collective 34% on the day they went public. But this proves my point about how risky it is to buy a stock on its IPO day.
Let’s use an example. pretend Initech has an IPO price of $100. Since there is so much demand for the company’s stock, the stock begins trading at $120 (up 20%). During the day, the stock shoots up to $150 by noon. But some intern bought some traders a crappy lunch, so by 1:30 the stock is down to $110. But then they realize that it’s Friday, the weekend is coming, and it’s time to party so the stock shoots all the way up to $175. Four months later, when the initial excitement died down, the stock is now trading at a measly $68.
Sound unrealistic? Who knows. The recent tech IPOs have shown that anything can happen on day 1, and that stock prices don’t always keep going up. If you had bought Initech at the end of the IPO Day around $170, you would be kicking yourself after 4 months.
Here is my advice - Know your risk tolerance. I’m 25, I have a lifetime (hopefully) of earning potential, and I may or may not have won a little money playing blackjack at a casino in Colorado last night. I can afford to take the risk.
If you aren’t willing to lose a substantial portion of your investment, I would recommend not investing in Facebook tomorrow. Or at least don’t put the whole amount you want to ultimately put in.
Sure, there is a great chance the stock might pop 25% or 50% or 100% tomorrow, but who knows how sustainable it will be.
If you’re going to buy Facebook tomorrow, remember that you’re playing in a casino and you have a 50/50 shot of landing in the black or red.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment.
- Image from Thinkstock/CNNMoney
These acquisitions highlight the recent trend of large, established Web-based companies dramatically expanding their mobile presence.
Instagram had a real chance at being the world’s mobile-only social network, hitting more than 30 million users in a little under two years. Which is why Zuck rapidly panicquired it after it received funding on Thursday, doing the deal in a weekend according to what we’ve heard. Same thing with Zynga target OMGPop, which was showing similar potential for mobile market domination as it overcame the Zynga games in the App Store.
While we can debate whether Instagram and OMGPOP sold too soon (in my opinion both companies made the right decision to sell at their respective price points), there is no doubt why they made attractive targets for Facebook and Zynga.
As Business Insider’s detailed presentation on the Future of Mobile points out, in a couple of years the number of mobile phones will dwarf the number of PCs. While we may think smart phones are already ubiquitous, there still is massive growth potential in this market as more traditional cell phone users see the appeal of smart phones and switch to have a better mobile experience.
We are only going to spend more time on our phones going online, interacting with friends, being terrible at Temple Run and Draw Something (like me), and paying for everything with our phones. While mobile advertising has yet to be perfected, it is clear that mobile phones will play a crucial role in the future of tech companies.
Zynga will be able to use OMGPop to build out its mobile gaming team, and Facebook can use Instagram to supplement its mobile app and “own” photo-sharing. These acquisitions have allowed both companies to become the dominant, go-to company in the gaming and photo-sharing fields.
I think the next industry a giant, web-based tech company is going to pursue is mobile finance. Companies such as Venmo, Dwolla, and Square are attempting to figure out ways to make mobile payments easier for customers and businesses, and I think companies like Amazon and Apple want to figure out a way to have a simple, seamless way to pay for everything on your mobile phone. I can definitely see one of these mobile payment companies being acquired by a web company that wants to expand its presence on your mobile phone.
Mark Zuckerburg announced that Facebook was acquiring Instagram for $1 billion yesterday, which set off a firestorm of blog posts, tweets, and news articles debating whether this was a sign of a bubble or if Instagram sold out too soon. I think Facebook needed to pay $1 billion to make the deal happen, so I thought I would offer my 2 cents on how Facebook could try to justify the $1 billion figure.
I’ve never really valued a company without any revenues before. Since I’m a restructuring banker, I have valued several companies that are massively cash flow negative, but they (or at least their management teams) all generally have rosy projections that increase their revenues higher than their costs within 3 to 5 years which give me something to work with when performing valuation analyses.
3 Traditional Methods to Value a Company Don’t Justify $1 Billion Price
However, the fact remains that the 3 traditional ways to value a company (DCF, Precedent Transactions, and Market Multiples) won’t help us justify the $1 billion sale price.
Great. So, if I’m trying to use traditional valuation methods to quickly value Instagram, I can’t really make any significant conclusions due to the lack of available information.
Since Early-stage, high-growth start-ups often have little to no revenue, they routinely need to raise funding to support operations. These fundraising rounds come with a negotiated valuation of the company at the time of the financing so that the company (i.e. founders) can issue shares to the investors at a set price they both agree on.
Instagram Raised $50 Million at a $500 Million Valuation Last Week
In a surprising move, Instagram reportedly raised $50 million of additional funding late last week at a $500 million valuation from a group of several top venture capital firms. So, it should be simple, right? If Instagram was worth $500 million on April 5th, shouldn’t it probably also be worth $500 million on April 9th, just 4 days later?
Well, it depends (shocker!). There is a major difference between financial investors (a VC fund, hedge fund, Private equity firm, etc) and strategic acquirers (other companies, usually in a similar industry). The subject company is more valuable to the strategic acquirer for 2 key reasons:
Giving up 1% of your market cap to take out biggest threat is a savvy move.
Okay, So Why $1 Billion?
Instagram had all the leverage. They just raised a massive round of funding and the founders were perfectly willing to use the money to build a bigger business that could challenge Facebook. I’m sure Google has expressed interest over the past few months and Apple may be sniffing around to get a hit in something social, so there were likely no shortage of suitors. Anything less than a massive premium to the $500 million valuation and the co-founders would have said “Hell No” and gotten back to grinding to build a multi-billion dollar business.
Also, Facebook didn’t want to make the mistake that Yahoo repeatedly made in failing to close deals with Google (in 2002) and Facebook (in 2006).
While the $1 billion may seem excessive, it was the price needed to get a crucial deal done and I believe Facebook made the right decision in making this acquisition.
(Note: Thanks to Hamza for pointing out a typo in an earlier version)