It’s been a week. By many measures, Facebook (NASDAQ: FB)’s IPO was a disappointment, closing at only 23 cents above the offering price. Now it is down another 1% from yesterday, closing the week at a saggy floor price of $31.91 – well below the $38 it opened at (a 16% drop).
Some commentators think it is a good sign that Facebook didn’t “pop” like so many past tech IPOs did (as much as 50% on the first day of the IPO, last year – LinkedIn (NYSE: LNKD) doubled. You can compare this with the 72% average “pop” back in the 1999 dot-com days). But the other factor to look at is still the fact that the underwriters and early investors still had to pour more money into it to put up a floor price.
The question now is what’s going on with Facebook? Has all the money been made already? Will it drop even further? When will the large investors stop pouring money in? Who’s making money shorting Facebook already?
What Facebook Did Wrong?
First, some have concluded that the opening price was just set too high. Others interpret the lack of a pop merely as an indication that the price was set correctly, at fair value. Another perspective is the fact that the company still achieved its own aims in the IPO, since the point was to raise money – $38 a share – and this it did, pocketing exactly that amount from the underwriters (large investment banks who then turn around and sell them to retail and other institutional investors).
Underpricing an IPO, on the other hand, would be a good idea to ensure at least some “pop” profit so as to reassure mutual funds and other investors, who might feel they are taking a chance on a young, small, or somewhat riskier company. Underpricing might also mean the investment banks have tried to purposely lowball the price in order to make more money off of the higher demand that they know is in the market.
Another nice side effect of having an IPO is all the positive publicity that can ensue in the headlines following a first-day jump. Apparently Facebook shared in none of that this time.
The Washington Post reports that between 2007 and 2010, the average IPO pop was just 6.6.% – this changed just this past year or so, however, with a small cycle of internet stocks (Zillow (NASDAQ: Z), Zipcar (NASDAQ: ZIP), and Angie’s List (NASDAQ: ANGI) that climbed between 25 and 79%). Obviously these numbers recall the early dot-com days, so Facebook’s breaking this trend might be seen with relief.
Still, there are potential problems with Facebook’s profit model. Barring further drops in the stock price (and issues such as the NYSE attempting to court Facebook to list with them instead), it is going to be the issue of revenues that investors should pay attention to most. The best advice, it appears, is still to wait this out at least a month before investing in Facebook.-