Facebook Redux

What went wrong with the Facebook IPO?  To summarize:  Too little, too late.  Facebook ("FB") was the long awaited IPO that was to reignite the IPO market.  Instead it was an incredible flop.  Why?  They waited too long.  And the hype got to them.  

Yes, Facebook is a landmark company.  It is the poster child for Social Media, a huge market that is just now going mainstream.  Web 2.0, if you may.  However, that does not mean that you should own the stock.  Investors have long confused great companies for great stocks for as long as there has been a stock market.  Why do we have to keep re-learning this lesson?

The market for FB stock on Second Market was robust.  The price was bid into the stratosphere.  Investors were guessing at the value of the stock, without any real knowledge of the company or its financials.  Through various mechanisms, Facebook had managed to limit the sharing of financial information solely to current investors.  So how is a prospective investor to make an informed decision.  They couldn't.  Unfortunately, it is my guess that most of the buyers on Second Market were high net worth retail–doctors and lawyers.

BLP had a million shares for sale, but no takers.  Institutions (our buyer group) were uninterested unless they could obrain current financial data.  Of course, some of those institutions were fishing for information, with no intent to purchase.  But, there were potential buyers, who would have bought stock at $37 per share if the price was supported by Company fundamentals.

FB, in trying to control every aspect of the IPO, laid the seeds of its failure.  By the time FB got to the IPO table, it's growth rate was slowing, and the valuation on the secondary market was breathy at roughly $80 billion.  And then you have all the lock-ups, the two tiers of stock, and other factors that will drag down a stock once it is public.  There were just too many uncertainties.  

My boss once said to me that "every company is a $2 stock."  Meaning that stock prices fluctuate, sometimes dramatically.  A $2 stock today can be a $40 stock in 12 months and vice versa.  Both markets and companies change.  As for FB, it has a lot of maturing ahead, both as a company and a stock.  And that's OK.

Funny thing about financial markets.  There isn't much of an institutional memory.  In two years, should FB perform, it could be perceived as a stock that should be in every portfolio.