The Facebook IPO was really hyped. Seemingly better than the Netflix, Linkedin, or Groupon ipos. And Morgan Stanley did a really good job getting enough brokerages and buyers to buy IPO stock at the pricing point.
Amateurs. Emotional. Enthusiastic.
When you buy IPO, you should know what the goals are:
- It’s a public exit for the original owners
Private stock has no open market value, Zuckberberg and the first employees of Facebook are looking to liquidate significant numbers of shares. So are all of the Venture Capital Firms.
- Morgan Stanley makes more money the higher the IPO is priced.
If the demand is there, Morgan Stanley makes more money (their cut is percentage based) the higher the price they can get for the desired number of shares to enter the market.
Most importantly, Morgan Stanley and Facebook didn’t make a pricing mistake – despite what you think when you see the 30% price drop. The truth is that IPO buyers and institutions liked the $38 price so much that it created the desired liquidity. They’re actually probably a bit sad that they didn’t price it closer to the $45 level that it hit that Friday. It’s a market, once Facebook and Morgan Stanley have sold their target shares, they no longer have as much concern over the accurate pricing.
The Falling Price is Market Correlated. The Greece and Spain crises have led to significant downturn in the overall stock market (Dow and S&P for you broad index people. When the stock market drops 1.5% before your IPO day of a speculative technology company and continues to drop that day, the price of your stock staying where you initially price it is nothing shy of a miracle. It’s not a technology bubble when companies like Ford and GE – or a commodity like Gold – see similar drops .
Most importantly, it’s important to remember that IPO pricing is volatile. All valuations of a pre-ipo company are done by venture capital investors choosing numbers with revenue figures and now, they’re going to ask ‘the market’ including many investors without their own analysis and account department to value it to.
I still wonder if the valuation is worth it. Apple (with quarterly profit increase of 95%) only being priced at a 13 P/E makes me wonder who would be investing in Amazon (170 P/e) or Facebook (100 P/e) – of course with that apple example, it’s hard to be convinced on most any new stock.
That said, Nasdaq going broke was bad for the ipo.