The stock is falling! The stock is falling! If you stopped following the Facebook IPOcalypse on Friday, it might be time to pull up your chair again. FB has plummeted 12 per cent as of this writing, with no signs of pulling out of its nosedive. Ruh roh.
But don’t worry! There’s a perfectly good explanation for all of this. The truth is, Facebook’s been heading for a tailspin since the very first trade.
Here Comes the Drop
You’ve probably read that the initial Facebook IPO price was $US38. And that’s true enough, technically. But the only people getting in on that $US38 price point were big institutional banks and their clients. That trading occurred Friday morning, before FB officially hit Nasdaq, and drove the price up to $US42 by the time it was actually publicly traded.
What’s that mean? Even though FB closed out Friday at $US38 — making Zuck’s underwriters look like they had priced the IPO perfectly — it had actually already lost nearly 10 per cent during the free-for-all trading that really matters. And it actually did much worse than that.
Here’s the thing about pricing an IPO: It’s an inexact science. In fact, it’s mostly voodoo engineered to drive as much money into the company’s coffers as possible. If a stock pops immediately after trading starts, then the IPO could have been priced higher, meaning company and its bank advisors left money on the table. If it dips, everyone loses money. Oh, and also? It’s embarrassing.
That second point is more important than you might think. Banks sell their services on reputation and performance, and boning the third-biggest IPO in US history is a great way to scare off future clients. Which is why they threw millions and millions of dollars at propping up the price on opening day.
This chart from Business Insider (by way of @bourbon_meyer) might look just look like a heap of numbers, but in financial terms it’s Braveheart. See that giant number next to $US38? That’s how many shares Morgan Stanley and Facebook’s other underwriters were willing to absorb to make sure that the price didn’t fall below that price. HOOOLLLLLLDDDDDDDDD.
That sort of behaviour isn’t limited to an IPO as high-profile as Facebook’s; it’s actually standard operating procedure. But yesterday’s insane volume driving the price downward meant that Morgan Stanley had to put an insane amount of money towards propping it up. To put it in Little Dutch Boy terms: $US38 is the dyke, the river is everyone trying to sell Facebook shares down, and Morgan Stanley was the billion dollar finger plugging the hole.
Today, it took the finger out.
Fair Is Fair
To be honest, it shouldn’t be terrifically surprising that Facebook shares are falling; if anything, it’s a relief that the markets are shying away from the irrational exuberance that can indicate — or more likely in this case, contribute to — a terrifically bad bubble. The company was valued at $104 billion, for goodness sake. This oversimplifies things, obviously, but at its current rate of annual profits it would take Facebook over a century to live up to its billing.
Facebook was never worth $US104 billion. And the IPO was never about a stock price shooting into the stratosphere. There’s a reason nearly every significant early investor — including Mark Zuckerberg — sold of tens of millions of shares in the lead-up to Friday’s debut. It was easily the best price they were going to get for the foreseeable future. Meanwhile, Facebook has an extra $US16 billion in the bank. Win-win, assuming you were already a billionaire.
So today, without reputation-saving bankers to prop it up, Facebook is falling back down to a price that makes sense for what it is: A profitable, advertising-driven social media company that remains unproven in key areas like mobile, but that seems virtually assured of healthy profits in the near term. And when it goes low enough, it’ll start to go up again. And then up and down and up and down, on the random walk that all stocks are subject to.
It’s just that sometimes the first step is a doosy.