Wednesday, August 15, 2012

All You People That Strived to Buy Facebook Stock – How’s That Going?

Ready for Another 1.5 Billion Shares to Hit the Market?

In the 19th century people wanted to get rich quick and so there were gold rushes and land rushes where people fought and clawed their way to take possession of a gold mine or free government land.  In Oklahoma folks lined up to lay claim to Oklahoma land (and this was before air conditioning!) and some left the starting line early, thus giving the state the nickname “Sooners”.

Victor J. Blue/Bloomberg News

 David Ebersman, center, Facebook's
chief financial officer, said he was
 "disappointed" in the stock dive.

Really, he is very disappointed
Today that same phenomena exists when a hot new stock hits the market, and the most recent case was the public offering of Facebook stock.  Like staking out land in Oklahoma, it’s not turning out exactly a folks had hoped.

In May, when investors tripped over themselves to buy a piece of Facebook, not even the skeptics predicted what has happened. Three months after the offering, shares have lost more than 40 percent of their value, closing at just under $21.81 on Friday, from $38 on May 18.

And are things about to get better?  Well, probably not.

The next test for the stock could come soon. Over 1.6 billion shares will be eligible to come on the market in several waves, starting on Thursday, when a number of shareholders are allowed to sell. Investors may fear that an influx of shares could cause prices to fall even more.

“It becomes a company perceived as vulnerable rather than invincible,” said David B. Yoffie, a Harvard Business School professor who sits on several technology company boards, though none that relate to or compete with Facebook.

The problem of course with Facebook is how exactly does the company make money?  And not just a little bit of money, it has to make a lot of money to justify the billions that were paid in the initial public offering by investors who once again may have been victim of Wall Street hype.

Not least, the stock seems to have been jinxed by Facebook’s own fairy tale.

“The underwriters (and the media) did a great job of hyping Facebook leading up to the I.P.O., and the sell-side (including me) did a great job of hyping it after,” Michael Pachter with Wedbush Securities, an equity research firm, wrote in an e-mail.

Does any of this mean that Facebook shares are not a good investment.  The truth, which you will only get here is this.  We don’t know.  Nobody knows.

Still, some investors remain bullish. Facebook is profitable, it keeps its nearly one billion users glued to their screens longer than any other Internet site, and it is aggressively experimenting with new ways to drum up advertising — its main source of revenue. Just this month, for instance, it began offering application developers a way to focus ads, and sought to diversify revenue by opening its site in Britain to online gambling.

But the cautionary note for all you investors who were able to get Facebook stock in the IPO is this heavily used maxim, “be careful what you wish for, you may get it.”

Good luck boys and girls. 

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