THE FACEBOOK IPO: WHAT DID RETAIL INVESTORS EXPECT FROM WALL STREET: TRANSPARENCY?
WHAT IS A RETAIL INVESTOR? POGO SAYS THAT BE YOU.
On May 18thth 2012 Facebook opened at $38 dollars a share. Initially the share price rose in to the low $40 range and then fell back. The lead underwriter, Morgan Stanley and others had to provide a floor of support to keep the stock just barely above $38 a share at the close of the first day. The stock has drifted slowly down ward until it closed at $31.91 a share before the Memorial Day Weekend.
Initially the stock was extolled as to its future prospects during a private road show by CEO Mark Zuckerberg, COO Sheryl Sandberg and other company executives to institutional investors, mutual funds and other large investors who got to buy large blocks of stock at a negotiated price presumably below $38. The road show was organized by Morgan Stanley the chief underwriter.
Later a $38 opening price was offered to the public or retail investors geared to meet the $100 billion valuation (100 P/E ratio). This was based on Facebook’s recent annual profits of 1 billion dollars and its prospects for future profits based on its growing 900 million membership.
However the stock price had weakened even before the offering. General Motors pulled out as an advertiser saying their ads on Facebook didn’t sell cars. Also there was a delay in executing sales, allegedly caused by a slow circuit breaker, on the day of the offering so buyers watched while prices went up before they could consummate a sale and then watch as prices fell back after their purchase.
Most importantly after the road show, information came out shortly before the offering which was not shared with the retail investors that Morgan Stanley learned that new revenue did not increase as well with new members and that many members used mobile devices to access their Facebook account. This meant the smaller screens on the mobile devices had less optimum space for advertising and many members tuned out ads anyway hence the G.M. withdrawal. Also as compared with Google Facebook gets .04 ad click throughs per million page views while Google gets .08. This information was not shared with the retail investors even while the wholesale investors sold nearly half their positions, an extraordinary large percentage. Thereby charges and lawsuits arose that there was a pump and dump scheme by those insiders privy to the advertising revenue information
Thus the $100 billion valuation of 100 times price/earnings has yet to be proven. Google and Yahoo, more mature companies, sell for about 20 times earnings. Other facts came out like Zuckerberg, 28, has 20% of the stock but 57% of the voting rights. He has the final say on matters. For instance he purchased, Instagram a company that has no profits, for $1 billion dollars without getting the agreement of his board. Thus an investor has to put his faith in one person, albeit a hacking genius, to develop Facebook to meet its revenue and membership expectations. By now most of the astute wholesale investors have sold to the retail investors, probably on day one or shortly thereafter. Therefore the risk is on the retail investors that Facebook will perform as expected, a bet on the future with an unknown risk and sold under suspicious circumstances to the public.