05/20/2012
Post mortem on the Facebook IPO...
Everyone is now an expert on calling what happened, AFTER the fact. Let's go through the checklist of what went wrong and then do something constructive and useful - talk about what's next.
Mistakes came from all directions on this offering.
1) - The initial price range was 28-35. This was much too wide and should have had no more than a 3 point range, such as 32-35. We won't talk about valuation modeling from the underwriter, but we all know the stock is very highly valued. Moving on. The revision from 28-35 to 34-38 was only going to be a mistake if the pricing was going to be within that range. Obviously, it was and didn't price above. This is a psychologically important component of any IPO pricing, the perception that the deal is really hot. What should have happened is an initial tighter range of 32-35 and then price the stock at 38, to create the excitement.
2) - The pricing of the stock, albeit still very rich, was perceived to be all that the underwriters could get while still leaving some money on the table. Unfortunately, the investors had a different idea. The initial indications of 45 were in step with the size of the deal, but the sentiment of many was that the deal was so enormously oversubscribed that is should have opened with a double or at least a 50% pop. That didn't happen because pricing at 38 hit the street with an audible thud. Seeing only 45 caused many participants in the IPO shares to bail, hence the pressure that pushed the stock down to 42 for the opening, yet another disappointment.
3) - 337 mil shares was a large initial amount in the filing, but demand was off the charts. The fact that the insiders were selling a majority of the IPO shares to the public was not a big issue, afterall, the average price for the insiders was $1.11 per share. Yes, good country America, land of opportunity. The problem in this area was that the deal was expanded in shares by 25%. This apparently took took a lot of wind out of the sails of the IPO. Making it an issue of contention was that the company didn't offer the additional shares, the insiders did. It was no sign of bailing out because there is a problem internally, it was just an opportunity for others to monetize their long-term in vestment in the company from many years prior.
4) - Nasdaq also shares some responsibility because of the massive aspect of the offering and all the transactions that were part and parcel to the day's trading. Investors were not able to get their reports on what prices they sold there shares. The delays were excruciatingly long involving many hours before those reports were delivered. Doubt crept into the minds of anyone playing the stock and the sell orders hit the stock in the afternoon, which is typical of investors who have doubts of any kind about a stock.
One of the really huge friends Facebook had during this first day of trading was the clock. The pressure the stock saw near the end of the day from sellers on a second test of the IPO price of 38, was massive. Watching the orders and the accompanying share quotes get whittled down to almost nothing at 38 on the bid was difficult to watch. We were minutes away from a meltdown on what started out as a good offering, that turned into a disappointing offering, which could have easily become one of the most significant financial sinkholes in recent memory. The 38 price held and the stock rallied into the close. If the stock market closed a half hour or even 15 minutes later, the stock would not only have broken the IPO price but would have seen massive liquidations of an epic scale. So if the Facebook people had anything to celebrate last night, they should have included the clock.
Let's move on...what's next?
Monday, Facebook turns into a failed IPO that will join the list of Internet and social media IPOs that had their time in the sun, only to break their IPO price. We are not giving up on this behemoth of a company. But it does now means that all those who were pitching the negatives about the offering, vis-a-vis the fundamentals, corporate governance, stagnating market growth from new users, inabilities to monetize mobile, etc, will all be standing on their soapboxes. The absence of any new news items from the company will provide a fertile environment for the media to be overpowered by those who subscribe to those issues cited just above.
With the stock under pressure, it will be up to people smarter than us to come up with downside targets. But the point of this posting is 'So what's next?' Next is patience. If you haven't bought the shares, you are in the drivers seat. As the stock drifts down, talk to your broker and pick a level where you will be comfortable and buy. Yes, there will be some volatility spikes with the stock, but it is not running away from you - not yet. If you are a buyer, you must insulate yourself from the financial rhetoric on TV and in print. This is a visionary company that came to market in an overvalued situation. It will work and work on a grand scale, but from lower numbers.
Prior to the IPO, we wrote a research report on the company with our lowest of 3 Buy ratings. Just underneath that are 3 levels of Hold, just for a point of reference. Innovations and revenue generating platforms have yet to be announced and deployed. The question is, are you, as an investor, willing to sign on for that vision, or do you want to make incongruent parallels to currently trading stocks? The panic period for everyone who wanted to buy at any price before the IPO has evaporated. Other than listening to the media from now on, it's a buyer's market, if Facebook is your stock.
Facebook came into the stock market as an 8-year old seasoned company with quantifiable financial metrics. It was a proven company with everyone chomping at the bit to get IPO stock. Unfortunately, all that has changed because of the substandard performance of the stock on its debut. It’s going have to prove itself once again, but from lower levels. It no longer matters who was at fault for this performance. The big question is, once again… What’s next? Whatever it is and whenever Facebook releases it or them, don’t act surprised.
