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Now’s the Time for Calm

May 21, 2012

Of course, everyone is talking about how Facebook “tanked” on its opening day.  When a more politically-minded blog has two stories about Facebook up, you know it’s news.  Well, maybe it is.  HotAir linked to it because there’s some thought that underwriter Morgan Stanley propped up the stock on the first day.  No, they propped up their own investment, and that came out because they were so heavily leveraged in a big IPO.  Morgan Stanley knows that the technical trading flow would hammer a stock with no history that starts to dip too low, and it used its investment power to hold its own investment.  It’s the opposite of what JP Morgan Chase did that everyone is now complaining about.

So, no, I don’t pick on an investment company for trying to keep its investments intact.  I do pick on them for being ambitious in the first place.

“Facebook’s IPO priced at a level well-above where we foresaw compelling 12-month returns,” BTIG analyst Richard Greenfield said in a research note Monday. With revenue and earnings growth decelerating in 2012, “we find Facebook’s current valuation unappealing.”

And there’s the real problem.  I’ve seen quite a few companies in high-tech launch to IPO in my couple of decades here, and the ones that are over-valued eventually come back to reality.  I saw it up close and personal with companies I worked with every day.  It’s a painful reality, but doing a big IPO doesn’t necessarily mean that it’s all good times from there.

What Facebook got out of the IPO was the ability to reward the people that made it so successful to start, and they got operating capital to move forward.  The operating capital is the bigger picture, and now Facebook needs to adopt a business strategy that enables it to spend the money it has wisely to make more money.  If it can’t, then it loses the confidence of the open market in which it now plays.

So a stock bounce here or there isn’t as important as actually keeping its customers and finding ways to monitize that customer base.  Everything else is irrelevant.

Welcome to the market, guys.  I wish you well.

2 Comments leave one →
  1. May 21, 2012 8:29 am

    At least their trading symbol isn’t WEBVAN.

    WebVan was notable, of course, because it briefly had a market cap greater than that of GM and IBM. It wound up with a market cap about the size of the breakfast I just ate. The market ate it alive, and for good reason.

    But hype, as long as it can fool someone and profit someone else, will always be with us.

    FaceBook is at great risk. Perhaps it will survive and grow, but it is a poor gamble for someone’s nest egg.

    ===|==============/ Keith DeHavelle

    • May 21, 2012 10:53 am

      I think they’ll do fine, probably not at the market cap they currently have, but they’ll settle to a surprising price. Hype comes from familiarity, so I’m not surprised it started out with big expectations.

      By the way, Google seems to be doing really well despite the hype. I’m sure plenty of people who buy and hold will do fine with Facebook. But I should say that I’m not in it, and I see no reason to get in it.

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