In order to read this post, you’ve got to be a little cynical. When it comes to investing in the largest casino in the world, it’s important to think about multiple variable outcomes and logical conclusions to keep your sanity. For example, one can ask themself today with the markets up 1.5+%, “Who was the dummy panic selling last week? Bernanke is testifying on the Hill on Thursday and is going to keep this money train alive!”
Thesis: Retail investors will do anything a perceived authority (media, bank, government) will tell them to do. People will do whatever it takes to protect their reputation. Therefore, retail investors will buy Facebook stock because the very banks who took the company public at $38 will defend the stock post quiet period.
The lead underwriters for Facebook’s IPO are: Morgan Stanley, Goldman Sachs, and JP Morgan. As lead underwriters, you are in charge of booking, billing, pricing, and allocating shares. Your goal as lead underwriter is to raise as much money from the public as possible, while simultaneously allowing for investors to profit once the stock goes public. The best IPO is arguably the one that goes up 5-10% after listing, and shows a steady increase over time.
If you price your IPO too low, the stock will surge, leaving money on the table and a potentially annoyed corporate CFO. But who really cares that much since they’re all rich now. If you price the IPO too high, like underwriters have with Facebook, you will see the share price drop like a lead balloon.
Despite what seemed like endless demand at the time of pricing, underwriters for the Facebook IPO botched the deal. Dropping 33% to $25.60 a share from $38 in just three weeks is unheard of, especially for a deal this size. Institutional and retail investors alike, ran away like mice fleeing a sinking ship. Something must be done!
QUIET PERIOD MEANS SHUT THE HELL UP!
There’s a reason why Mark Zuckerberg got married and went on his honeymoon after the IPO. Quiet period! During quiet period, which is generally at least 30 days post listing, management nor the bankers who brought the deal public are allowed to say anything material to positively (or negatively) affect the company’s share price according to the SEC. Quiet period means no bullish reports by lead underwriters, no announcements from Facebook’s CFO saying the quarter is tracking well etc.
Nobody “in the know” is allowed to say anything. What a perfect time to go on honeymoon! Now you know why Mark hasn’t said anything to anybody. He can’t! Meanwhile, every bank that wasn’t on the deal has the right to publish their analysis ASAP. After an IPO flop, more often than not, the analyst reports will be negative because 1) Bearish people come out during bearish times, 2) It’s what the public wants to hear, 3) They weren’t on the IPO. If you weren’t one of the many banks on the Facebook IPO, you’re feeling pretty irrelevant because every bank that matters participated.
Just notice the names of negative reports coming out for Facebook. Who is S&P Capital IQ, for example? Nobody cares if they upgraded the stock to “Hold” from “Sell” with a $27 target price.
HERE’S HOW IT’S GOING TO GO DOWN
Now that we’ve got a framework for making some assumptions, let’s predict what will go down.
* After quiet period is over (by July 1 most likely) Goldman, Morgan, and JP Morgan will all come out with positive recommendations on Facebook stock. If they were willing to take it public at $38 and sing Facebook’s praises during the roadshow, then they surely will recommend the shares 33% lower at $25 with a target price of hopefully $38 or higher. Otherwise, hello major backlash!
* Retail investors will get all in a tizzy again because they will do whatever a perceived authority will tell them to do. The stock will start moving up, and the mass media will start talking about how oversold Facebook stock is and get the frenzy started again. Remember, they were the ones responsible for the euphoria by highlighting Facebook everyday online and on TV. Pressure will be put on institutional investors who know better and they’ll start accumulating as well.
* Mark Zuckerberg and Sheryl Sandberg will go into overdrive, proving to the public their company is the same company in May when they sold shares at $38. It’s SHOW-TIME now, and they must beat their first quarterly results to the public or else forever be distrusted and vilified by the investing public. They’re billionaires, remember? The public hates rich people who stay rich if the rest of us get poorer!
* Facebook stock goes back over $30 after their first quarterly results and index institutional investors start piling in again because with a market cap of $65 billion, the stock is too large to ignore.
* Lawsuits against Facebook subside and retail investors are now up over 20% in just a couple months as they decided 66X trailing earnings and 1.1X PEG was way too cheap.
SUCH EASY LOGIC, EVEN A CONGRESSMAN CAN UNDERSTAND
You might think it’s overly cynical that people will do whatever they are told. The fact of the matter is, you’re wrong. McDonald’s is the official sponsor of the 2012 Olympics, meaning that Olympic officials believe that McDonald’s food is healthy, and a good representation for the world’s most elite athletic event. The government tells us the employment picture is getting better, which is why consumers are partying like it’s 1999 again. People will always have hope.
Of course I have no idea where Facebook’s stock will be in the third quarter or at any particular point in the future. Perhaps Facebook’s stock takes a dive like that of Zynga and Groupon, which would be really ugly. What I do understand is human emotion. Human emotion is telling me that the underwriters who took Facebook public, and the senior management who sold shares at $38 will do everything possible to make it up to investors and prove we aren’t all just muppets.
Readers, where do you think Facebook shares will be at the end of the year and why? Would you be buying in the mid $20’s? What do you think about this fun exercise?
Disclosure: Bought shares of FB at $25.80 this morning.
Regards,
Sam
If you liked this article, you can like Yakezie on Facebook. Maybe you’ll help the stock go higher!
I think there are better stocks than FB. The market is easily shakable and FB isn’t going to stand the storm when the storm comes.
There are always better stocks than whatever one is thinking. I think you’ve missed the point about the post’s logic.
I always thought the initial pricing and offering was about right. That was around $30 a share and with about 25% less shares. My rough math would put that around $20-22 per share under the current number of shares. This is where I think it will land. Might even go below for awhile, but that’s probably the settling point.
Fascinating insights to the IPO process Sam! I didn’t realize there was a quiet period after the listing of all IPOs. Makes a lot of sense though. I didn’t expect the price to fall as much as it has so quickly but I don’t think it is doomed either. I would guess it will bet back into the high 30s by year end and maybe the low 40s but the markets have been taking such a dive that its hard to know what could happen.
Yep, there’s a quiet period for all IPOs that lasts usually 30 days. Nobody really noticed or complained before because no IPO has been this hyped and has tanked this badly before.
I’m thinking pretty similarly to you on this one, Sam. I don’t know about buying in the mid-twenties, but if the stock hits the low-twenties, I might buy and then sell when it rebounds as you outline above (which I also think is pretty likely).
Maybe I’ll do a high school investing experiment and “buy” some shares! It seems like it won’t tank like Groupon, but what do I know?
Even at $20 a share, FB is priced at $47.70 per user. The most valuable place for growth is North America, yet Facebook lost North American members from 2011-2012. Negative growth.
Facebook has to significantly increase profits to sustain its valuation. But because valuable user growth is slowing (and now negative in a key market), revenues per user are what matters. I don’t know how you increase revenues per user on a website without negatively affecting user experience.
I wouldn’t buy at $20. No way.
I don’t really like the FB stock long-term right now in mid $20s, unless I saw some significant growth in earnings. It was way over priced, it’s still over priced, and too much speculation to support such a high prices.
I don’t buy individual stocks but this was definitely an interesting article. I will be paying attention to facebook but I’ll just be happy with however I indirectly own it through mutual funds.
Interesting thoughts on what will happen here in the next 30 days. I think the selloff is overdone, but I’m not quite sure where I want to enter, if at all.
Sam, I wrote an extensive three-part series on the facebook IPO. Check it out:
dividendninja.com/why-you-shouldnt-buy-facebook-part-1
Cheers
Avrom
Thanks for your insight. I was hoping to hear some more contrarian reasons why to buy as everybody is on the bandwagon to sell.
What is your background btw? Couldn’t find it in your about page. Thx!
Your post made me wonder: what percentage of investors do what they’re told vs. what percentage of people do what they’re told. It would seem to me that many of the sheep aren’t invested in the market. They’re too busy spending their whole paycheck at the mall.
I will do what I’m told and go buy facebook now. Thank you Sam! Really, though, I think facebook isn’t as vunerable as Zynga and the like to drop to the ground. I’m just waiting for them to announce a new, creative model for genterating income off of their 1 Billion users and will watch the stock skyrocket. For now, I will wait on the sidelines as I don’t have the spare cash to invest.
Oh heck, I don’t know. I’m glad I didn’t get the stock, there’s just too much hoopla around it. I don’t want a stock of a company that’s splattered all over the news for this and that. Seems like that ljust leads to volatility and I don’t want that.
[…] Facebook IPO was a flop and homebuyers are still quite cautious even here in bull market San Francisco. As a […]
Haha, there’s usually a grain of truth or more to the cynic’s approach.
The only way I’m getting into Facebook is if the index funds I’m in purchase it. I don’t like the company on a philosophical level and don’t have kind words to say about them or Zynga… but that’s just a personal point of view.
I think there’s potential for Facebook to charge for its service. Millions of users have years worth of comments, photo’s and other media on Facebook. Would they really want to lose all this and have to rebuild thier social profile elsewhere just to avoid paying say $5 a month. If we estimate there are half a billion “active” users, that’s a lot of potential revenue for Facebook!
Pundits and media always manipulate average Joe. That’s how they make their big bonuses. I agree with you that FB might see $38 before it sees $25 again as big investors will pump the stock for retail investor to suck their losses.
I wonder if you are still holding onto your stock