With the Facebook IPO quickly spiraling into debacle territory, the news media and the investment banking community are piling on, pointing fingers in all sorts of directions at all sorts of folks.
This morning, Facebook shares are trading a new post-IPO low of around $31.90, down 6% on the day. (The shares were sold in the IPO at $38.) At the same time, new allegations are surfacing about the flawed Nasdaq handling of trade confirmations during the IPO and changes to analyst estimates during Facebook's roadshow.
You can track the IPO in real-time below.
Meanwhile, facebook Founder and CEO Zuck's net worth has plummeted nearly $3 billion since the IPO. Bad week, eh?
All of these are problems, but ultimately you can blame the price. Stocks that are priced highly on a price/earnings (P/E) or price/sales (P/S) basis have much less of a margin for error than stocks with reasonable valuations. Facebook's high valuation -- and the bankers' last-minute changes in the terms and the number of shares -- flooded the market with stock just when the company had a bloated valuation and more questions were being raised about its business.
The market is an arbiter of price based on supply and demand. Technical problems can cause price distortions and supply/demand imbalance in the short term, but a company's share price is determined in the long run by the amount of value it creates.
When you float a company at a P/E of 90 and a P/E of 25, it sets up the potential for big price stumbles. Back when the tech bubble was ending in 2000, I made a rule never to pay more than 10 times sales on a company, no matter how well it was doing or how fast it was growing. I have seen far too many 10X or 15X sales companies blow up in the past. It's a bad risk/reward bet. Facebook traded out of the gate at 25 times sales.
Let's look at some of the other developments surrounding this ugly IPO:
This morning, Reuters reported that analysts at Facebook's lead underwriter, Morgan Stanley, cut revenue forecasts for the company and selectively disseminated this information. Reuters says this was done during the roadshow leading up to the float. If true, this is a big problem for Morgan Stanley, and it will likely lead to an investigation to see if the firm broke Regulation FD rules.
Nasdaq is fessing up to all sorts of technical problems with the IPO, including bad calculations of the opening price, incomplete trade confirmations, and quoting problems. "It was like the gang that couldn't shoot straight," a Fiduciary Trust employee told Bloomberg about the Nasdaq and the underwriters.
What should traders or investors do? Ultimately, an investment decision has to be based on a company's price and valuation. Other issues surrounding the Facebook IPO are catalysts for the price movement, but the company was set up for failure by having its stock priced too high going into the IPO. This was a combination of bankers trying to push things too high and insiders getting greedy.
The market is a price-discovery mechanism, and that mechanism is clearly broken. At this point, I don't think the market is going to have a fair or accurate method for discovering the price of this company until its stock has been trading for several months and the company has at least one earnings release under its belt. Right now, things are still too messy to figure out the trajectory of the company -- or the price.
I say stay away, unless the price drops to the mid-20s, in which case it gets more interesting.
Nobody seems to be clicking the like button over the new controversy that the Zuckerberg wedding has ignited: The size and provenance of THE RING! Is it too small? Is it a natural Burmese "blood" ruby (so named because of conflict in the region, not color)? If so, did MZ break the law to buy it? If not, is it a treated stone, and therefore less valuable?
Cause for another class action suit perhaps--disappointed brides blaming Facebook for their downscaled bling?
I was pretty sure,Insane Valuations in Social Networking were Harming the Capital Markets just not just sure which area.
Thanks for sharing.
My feeling is they still wont learn.
Why is that?
They invest before an IPO,not afterwards.A significant number of them exit the Company at the IPO stage(rather than Hold onto the Stock);but then maybe they thought FB was different...
If so,Wait till FB hits 20 Dollars,Thats when they will learn.
The important thing is How much Cash does he Have on Hand today(which is not tied up in FB Stock)?
Its one thing saying he a Billionaire,but if all his Wealth is just tied up in the stock that makes it very doubtful,After all that Stock Valuation(which is 16% Down today) could go Down even more over the next month or so.
Ok I got some numbers,Mark Zuckberg Personally sold 30 Million shares in the IPO,to raise USD 1.14 Billion.Apparently most of it will go towards paying his Tax Bill!!! Leaving very little spare.
As for the case of Eduardo Saverin-Its not like he is going to exit the US Scot-Free,he will most Definitely be Paying Exit Taxes(close to 700 million USD),if I remember correctly.
But at the end of the day,its his decision what he wishes to do with his Money and His Life.If chooses to spend it elsewhere,You can't stop Him.
Unless you are prepared to implement Full Capital controls.
How about asking them to pay an Annual Dividend of say 25- 50 cents First?
Let the Company Demonstrate a decent enough History of Reliably Rewarding Shareholders through Dividends,then I might get interested.
They claim to have 3Billion Cash on their Balance Sheet,so instituting a Small Dividend as a Policy of Rewarding Shareholders should'nt be a Bad Idea right?
You can keep rest of the cash for all your planned expansion projects(incl.Buying Opera Web Browser).
The moment I start seeing a Regular Dividend Paying History,I get interested,everything else is just Vaporware.
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