Unless you've been hiding under a rock for the past few years, you may have heard about this little social-media company that went public on Friday called Facebook
Today, I'll share with you five things that the Facebook IPO taught me and why they should matter to you.
1. Traders are too emotional
Here's a shock: Investors became so emotionally attached to Facebook's stock that they were willing to buy in at any price. Although I have no concrete evidence to back this up (but give it time, because I'm sure someone will do a study), I'd be willing to bet my right arm that more investors didn't read the Facebook prospectus than did. As Fool colleague Alex Dumortier pointed out, there are 23 pages worth of risks related to Facebook's business model in its prospectus; and by my calculations, there are now millions of investors holding Facebook stock out there who are bewildered why their stock ended the day up only marginally.
2. Long-term trading for IPOs means holding for three hours
This one is particularly true of most IPOs, but once again we saw in action that a stock's debut is nothing more than a media circus and a day-trader free-for-all. Facebook priced 421 million shares yet traded 580 million shares for the day – a 138% share turnover. Other IPOs have been even worse, including LinkedIn
3. Underwriters did a good job
I'm sure many of you out there will disagree with me on this, since the lead underwriters spent an as-of-now untold sum of about $1 billion in reportedly propping up Facebook's stock on multiple occasions at $38 per share (its offering price). However, the lack of a crazy pop or dive also demonstrates that underwriters did their homework to the best of their ability and priced the issue accordingly.
This is in stark contrast to LinkedIn, which popped more than 100% on its debut. One key factor aiding this is Facebook's large share offering of 421 million shares versus LinkedIn's relative pittance of an offering, 7.84 million shares, which made liquidity much easier and its share price less volatile.
4. Not all social media is worth buying
I've been pounding on this point for months: Not everything in social media is an automatic buy because it's related to Facebook, and today's action was a case in point.
5. Facebook is still overvalued
Once you get past the hours of commentary, the Wall Street buy rating before its shares were even trading, the first analyst sell rating just hours after it began trading, and the almost comical trading glitches at the Nasdaq, Facebook still looks like an overpriced stock at the end of the day.
There's little denying that the company is growing rapidly or that it has ample opportunities to grow its bottom line or expand its advertising partnerships, but it also has a lot of questions to answer that simply won't be answered for some time. For one, how will it translate increased mobile usage efficiently into advertising dollars? Secondly, what's its long-term plan for the Chinese market? Third, what are its plans for the cash it raised in its IPO? Finally, what sort of checks and balances are in place to make sure shareholder interests are kept at the forefront with Mark Zuckerberg maintaining a lion's share of the voting power?
These are just some of the questions that are left to be answered after Facebook's trading debut. What I can tell you is this: It's going to be a bumpy ride, and it may take months before we get a genuine feel for where Facebook should really be valued.
To echo the sentiments of my Foolish colleague Alex Dumortier, doing nothing may be your best course of action.
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