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Facebook IPO Takes Advantage of the “Little Guy”?

{ Posted on May 31 2012 by admin }

Source moneymorning.com.  As of 4pm,  May 31, 2012

After Facebook went public by debuting on Nasdaq on Friday, May 18 through an Initial Public Offering (IPO) at $38 per share, it quickly tanked (as of today, May 31, 2012, it is at $29.60).

By Monday, May 21, the stock price had fallen 11%. By Wednesday, May 23, there were already lawsuits claiming that investors were misled in the purchase of Facebook’s stock by the 33 underwriters, including Morgan Stanley, Goldman Sachs, and JP Morgan (oh boy, JP Morgan does not need any more bad publicity).

Underwriters are accused of mismanaging the IPO by either authorizing a price that was overpriced or agreeing to sell too many shares.

Shareholders in the class action lawsuit claim they have lost more than $2.5 billion since Facebook’s debut on May 18.

Investors are also alleging that certain institutional investors had access to information about Facebook’s financial strength that was not made available to “Joe Public”.  The “Little Guy” is feeling that he has been had and that the investment playing field was not even.  There are charges that Facebook intentionally hid information that its users were growing faster than the number of ads it delivers–financial information that might impact its value.  According to a Reuters report, Facebook told analysts who lowered their forecasts and only shared the information with certain groups of institutional and large investors.

To make matters worse, when trading opened on May 18, the Nasdaq had technical problems due to the dumping of the stock by many institutional investors, including late execution reports, communication problems, and delayed quotes.

Now I am not an expert at valuing stocks, but the facts seem to indicate that Facebook appears to be extremely overvalued.  Its $104 billion initial valuation was 100 times earnings.  So what does that mean?  Well, by contrast, Apple and Google debuted at 15 times earnings, and today they trade at 13.6 and 18.2 times earnings, respectively.  If you look at sales as an indicator of value, Apple and Google trade at 3.75 and 4.9 times sales, respectively.  By comparison, Facebook is around 20 times sales!  Some are arguing that Facebook’s true price per share should have been under $8 per share and not $38 if you use sales as a metric!  Add to this a sort of “Occupy Wall Street” distrust and the allegations of favoritism (and people don’t seem to like Mark Zuckerberg personally so much) and this stock appears to be in for a rough ride.

So why did people flock to the Facebook stock? For the same reasons people buy overpriced products by Louis Vuitton, Burberry, Chanel, Prada, Gucci, Michael Kors, Kenneth Cole, Ralph Lauren, Versace Fendi Givenchy, etc., or shop at overpriced stores such as Nordstrom, Neiman Marcus, Saks Fifth Avenue, Bloomingdale: Brand name recognition and reputation.  People are also looking to buy the next Google before it costs too much. However, like with any purchase, the focus should be on quality and value.  For investments, you need to invest wisely, especially since investments are key to building wealth, your retirement, and more significant than buying depreciable items such as a shirt or purse.  For Facebook, the product is overvalued and the true information on the stock was not shared with the average little guy investor.  Frankly, if the numerous allegations are true and given its overvalue, it deserves a tough ride.

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