Facebook IPO – Smart Money Slips Up?

The VCs and Zuck’s employees got paid today. But not by me.

Here’s one skeptical take.

The Facebook IPO has priced at $38, at the high end of its revised range, representing a market cap of $108.6B, assuming exercise of vested options.

The price is about 26 times trailing revenues and 104 times earnings, which discounts 66.2% compound annual growth over the next 10 years.  In comparison, Google grew at a 42.4% CAGR in the 8 years after it hit the $4B revenue milestone.

As consumer Internet use shifts decisively toward mobile platforms, Facebook’s ability to monetize their position is constrained by the control that Apple and Google have over 3rd party Apps.

GM’s repudiation of its Facebook ads is also troubling, calling into question the efficacy of ads, even on the browser platform.

Here’s some general detail:

“I think that the market was not there for this many shares,” said Michael Pachter of Wedbush Securities. “They priced it right if the goal was for the stock to trade flat [um… so they priced it properly? -DW], but it appears that the addition of 50 million shares on Wednesday night caused a supply/demand imbalance, and the market appetite wasn’t sufficient to support the stock above issue price.”

Some analysts believe the offering was priced too high, maximizing the return for the company itself, but not leaving sufficient room for an upside in trading — or that first-day pop that many Internet debuts have experienced.

If my company IPO’d with a first day pop I’d be spitting nails furious. Not today, and good. So what happens when there isn’t a pop? Well, it might mean you priced it correctly. It might also mean you priced it too high and the Investment Banks mask the error by aggressively making a market to support the flippers (via).

“Stabilization is the bidding for and purchase of securities by an underwriter immediately after an offering for the purpose of preventing or retarding a fall in price. Stabilization is price manipulation, but regulators allow it within strict limits – notably that stabilization may not occur above the offer price. For legislators and market authorities, a false market is a price worth paying for an orderly market.

They’re buying up those shares to save face. The beneficiaries? The lieutenants who got paid:

Multi-million dollar mansions and $100,000 Porsches are flying off local shelves in the Palo Alto, Santa Clara and Menlo Park areas of California. And the charge of luxury living is being led by a group of young entrepreneurs and techies as well as investors and venture capitalists that have scored famously from Facebook’s Nasdaq debut.

More Angel investors, more startups to come.

Addendum: holy cow, the WSJ has an awesome graphic of who sold:

This entry was posted in economics, entrepreneurship. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s