Time to Rage
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:
- Investors have learned from some of the mistakes they previously made when they overhyped recent tech IPOs and bought shares at extravagant prices. On Friday, they did not give in to the mania that preceded Facebook’s IPO (here is a great visual summary of some recent tech IPOs from the WSJ that may have given investors a reason to be cautious).
- The IPO was probably priced too high. The initial IPO price range was $28-$34. The bankers raised the price range to $34-$38 and ultimately priced the IPO at the uppermost price of this range. In retrospect, it appears that the bankers were too aggressive in setting the price.
- However, this aggressive price allowed Facebook to maximize its IPO proceeds. If the stock had popped after it IPO’d, it would have been a signal that the bankers underpriced the IPO and Facebook would have left some cash on the table by undervaluing its stock.
- These last two bullet points represent the tension that Bankers need to balance when they set the IPO price. On the one hand, the Bankers have an obligation to the company that is IPOing that wants to raise capital. On the other hand, the Bankers want to make sure that there is some type of price appreciation on the IPO date, which is a sign that investors view the company favorably and that its stock is attractive. Ideally, Facebook would have closed on Friday up around 10-15% so Facebook would have been satisfied it got a good deal and investors would feel that there is a lot of demand for Facebook stock.
- The investment banks are pretty unhappy because they had to buy millions of shares to support the stock price. Due to a lack of demand for Facebook stock at the prices in the high $30s and low $40s on Friday, Facebook’s investment banks had to buy millions of shares to support the stock price. The reason the banks did this is if Facebook’s stock had fallen before the IPO price on Friday, investors would have panicked and the declines that occurred on Monday would have happened on Friday.
- Investors have serious concerns about Facebook’s ability to generate sufficient revenues to support Facebook’s “expensive” valuation (AKA Facebook is overvalued at its current share price)
- We should not focus on this short-term “paper loss”. 2 days of trading don’t even begin to scratch the surface of Facebook’s future. The reason why I’m not upset about my immediate short-term loss on Facebook is that I still think Facebook will find a way to make enough revenues to make it an attractive long-term investment.
- Despite this view, I’m an idiot and should have waited a few days before buying to see how the market reacted to the 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.
