Sunday, 27 May 2012

Has the FaceBook IPO been Over-Hyped?

Mark Zuckerberg is celebrating becoming a billionaire following the FaceBook IPO on the NASDAQ index.

There is no denying the fact that there has been lots of interest in the FaceBook IPO. Mark Zuckerberg has become a billionaire (on paper at least) and there are celebrity beneficiaries including Bono. The only problem is the possibility that the hype could be misplaced. Is this another Dot.Com bubble that is going to fall flat in a few months? The share offers opened on the NASDAQ index at $42.
The pundits anticipate that when all is said and done, FaceBook will raise $16 billion for its shareholders. The social networking website is currently controlled by Mark Zuckerberg, Chris Cox (Vice President-Product Development) and Sheryl Sandberg (COO). Three other high ranking executives are to benefit from the windfall.
A share offering that exceeded expectations
Although the quoted price was $38, the hype ensured that buyers had to budget for about $42 on the NSDAQ index. Investors expect that this price will fluctuate until there is a relatively stable model. The last time internet shares experienced such interest was in 2004 when Google did its IPO. FaceBook (worth $104 billion) is now officially more valuable than Amazon. [1]
Amidst the self-congratulation, there are indicators that some of the joy might be a touch too optimistic. Wall Street has been going through a particularly challenging phase despite the significant fiscal stimulus funds directed at it. The Euro is also facing pressure given the fact that there are rumors of a hasty Greek exit. Investors would be wise to take a cautious attitude to these IPOs.
A risky venture with numerous rewards
Although the venture has created over 200 FaceBook millionaires worth more than $30 million, there is plenty of skepticism from a professional point of view. The value of this company relies on users and their preferences. We already know that MySpace was unceremoniously displaced by YouTube, FaceBook and Twitter. There are no guarantees that the same cycle will not be repeated.
Last year the company had $3.7 billion worth of revenue. This is significantly less than Goldman Sachs which brought in $29 billion. Therefore it should be a cause for concern that the investment bank shares are currently half the value of the FaceBook IPO. Even with 900 million users, there is no guarantee that it will retain that level of brand loyalty. There are no captive audiences on the internet.
Getting ready for the inevitable drop on share prices
Already there were warning signs when the initial share price of $42 fell to $38. By the end of the day some shares had lost as much as 18%. [2]Tim Loughran is a Finance Professor at the University of Notre Dame. He explains the dynamics at play: "A 15 to 20 percent pop is in the realm of possibility…Given they already moved their IPO range up and increased the size, that's bullish to begin with." [3]This is not the kind of volatility that investors can afford to play with.
As a long term prospect FaceBook remains a risky venture. This is despite the fact that it has been described as the ‘Corporation of the Century’. The main problem is that it relies on visitor numbers and there are no mechanisms for ensuring that those visitors have no alternatives. Google by contrast has been able to establish an online monopoly in all but name, largely as a consequence of its exclusive power amongst the search engines.
  1. M. Norton,” Facebook, Zuckerberg Opens NASDAQ Trading On Day Of IPO”, 18th May 2012, It Pro Portal,
  2. A. Oreskovic,” UPDATE 3-Facebook fizzles in debut, shares skirt IPO price”, Reuters, 18th May 2012,
  3. D. Rushe, “Facebook shares open at $42 as it begins trading on Nasdaq”, 18th May 2012, Guardian,

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