In light of the recent Facebook IPO flop we revisit the popular social media site. In February we posed the question, “ Is Facebook a good investment ?” It was our opinion then and our opinion now that Facebook will provide value for long term investors only if it finds effective ways to monetize its name and technology. We also noted that when floating an IPO those in charge commonly set the price so that the stock is likely to go up on the first day of trading. That was not the case when Facebook went public. In fact it appears that it was a Facebook IPO flop. The IPO was offered at $38.00. The stock opened promisingly at $42 a share and promptly fell into the $38 range. After buying by the investment bankers who ran the IPO, the stock rose back as high as $41.68 before eventually ending the trading day at $38.27.
The IPO was eminently successful for Facebook. Just recently a figure in the $26 a share range was bandied about for a likely IPO price. The investment bankers pushed this up to $38 and Facebook realized $16 Billion. And the investment bankers won with their fees and commissions. However, anyone now holding Facebook stock may be wondering how to unload what may well be an overpriced stock.
In the hype that preceded the Facebook IPO flop the IPO was expected to price the company in the top ranks of American Corporations. At the same time the issue of whether or not advertisers can sell anything via Facebook came up. General Motors quit placing ads on Facebook because they were not getting any sales. During the same time frame the possibility of a Greek financial collapse reemerged and possibly excessive austerity measures threaten to drive Europe into recession. Facebook and its investment bankers may well have been greedy, raising the price of the IPO in the face of bad news. In the end the bankers made money and Facebook made lots of money and anyone holding the stock lives in fear of a worsening Facebook IPO flop.
What Is Next for Facebook?
Facebook remains an incredibly popular social media site. But it may not be as strong on handheld devices as it is on personal computers. As we noted in our “Invest in Hewlett Packard” article some months ago people are buying fewer personal computers and using hand held devices such as tablets for their emails and chats. If that is all one does a tablet makes more sense than a PC. But, if Facebook does not do as well on tablets it may lose market share to other, newer social networking sites. And there is the issue of sales. In the end the Facebook IPO flop is because big, serious investors do not see how Facebook can successfully monetize its large following. It may continue to be very popular but not all that profitable. If that is the future that Facebook saw, then it was good reason to pull some cash out of the operation by way of an IPO. No one can blame Facebook for cashing in on their success by providing a public means of trading shares. The problem for investors is whether the Facebook IPO flop is a measure of things to come in which the stock will progressively fall to a more realistic price range. Those who do their fundamental analysis apparently think that the stock is priced too high. As usual we are not suggesting that one invest in Facebook or that one ignore the stock. Rather our point is to provide an example of thinking through an investment.