Facebook IPO -- Up, Down or Out?

Source:technorati.com

Was the Facebook IPO the next great quantum leap for the social networking industry, or the latest 'pump and dump' tragedy? That's the question people are still asking after the abominable performance of the company's initial public offering phone right after it began to be publicly traded. Opening to the public after you media fanfare at wall-to-wall buzz, the initial public offering began to crash well below the 40+ dollars the stock sold for its first sourday of trading. Some wonder whether this debacle was a mere accident of heated overvaluation, or calculated jerking around of the general public, to fleece their dollars during a whirlwind of initial hype.

Media reports and initial representations made by the company and its supporters estimated the value of Facebook at as much as 100 billion dollars, with an initial offer price as $38 per stock. A variety of alternative voices on the Internet and dissenting financial analysts suggested this valuation was vastly in excess of the company's earnings, asset base, and other traditional metrics of the stock's worth, and warned against emotional attachment to the Facebook IPO because of previous examples from Internet history. Were people accurately evaluating the worth of this IPO, or were they caught up in the greedy dream of being at the "ground floor" of another Microsoft or Apple?

In light of what both the Washington Post and Bloomberg News have reported as a "botched stock offering" questions have been raised about the fallout over the IPO's performance. SEC and Congressional figures have also begun to scrutinize the stock, and are scheduling hearings on the circumstances, regardless that Facebook may not be ready to face the heat of Washington. “They have not made the connections and personal relationships they would like to have made,” former Senator Byron Dorgan of North Dakota. “I’m sure they’re going to be doing double duty trying to introduce themselves and at the same time answering questions about the IPO.”

The heart of the financial issue whether Morgan Stanley, chief handler and market maker for the IPO, began to advise some clients that the Facebook IPO's profits would be lower beforehand, and thus knowingly promoted an overvalued stock. Defenders of the bank point out that different rules exist for IPOs, that permit an ambiguous assessment or behavior by underwriters during that phase of the stocks' public trading life. Morgan Stanley is compensating clients who overpaid, but that does not erase the perception by many that the IPO was a classic 'pump and dump' stock that was 'pumped up' by the markets to take money from ordinary investors, before being 'dumped' so as to rapidly to create a quick kill profit for selected parties.

Source: gadgetsboy.co.uk

It didn't help the IPO's case and that Facebook founder Mark Zuckerberg himself sold off overbillion dollars in shares soon after the launch of the stock in public trading. In the wake of his lack of loyalty, many wonder whether the value of the stock exceeds $10, when all things settle out. As a result of this and other underwriter behavior, a class-action suit has been launched by Kessler Topaz Meltzer & Check, LLP for many investors alleging that the company and the underwriter failed to disclose and misrepresented material adverse facts, which were known to defendants or recklessly disregarded by them. This would violate the Securities Act of 1933 in several particulars.

Most importantly, the complaint alleges Facebook's revenue has been falling due to trends in the digital industries – a move of consumers from websites to mobile apps, for example – and that this trend was not represented in the prospectus or other promotions of the IPO. In Facebook's defense, numerous financial observers (from Forbes to Adweek et al) have argued that anyone cared to do their homework would have found the dissenting assessments about the stocks' worth, and so should not have been herded into the stampede to buy the IPO. It isn't Facebook's fault if many people just read the word-of-mouth, and didn't do their homework, according to this school.

Some savvy stock investors add that one way to circumvent the erratic performance of any IPO is to buy only at a fraction of the starting price. One investor sums this up as, "buying half of your stock position at down 30% from the IPO high, and the other half at down 50% from the IPO high would be quite profitable." Under this scenario, the Facebook IPO is great long-term if stock buyers hang in there from the proper starting point. Don't buy first day at initial price, looking to sell for the quick cash, and that is the classic greedy sucker's gamble. You don't know with stock is going for certain, but you do know where it's been – so buy in at a fraction of the additional price, and hold.