5 Things I Learned From the Facebook IPO

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 (Nasdaq: FB  ) . The much-anticipated IPO caused 580 million Facebook shares to trade hands on the first day of trading (82 million in the first 30 seconds), which accounted for 21% of total volume for the Nasdaq Composite on Friday.

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 (Nasdaq: LNKD  ) , with share turnover of 385% when it launched, and Pandora Media (NYSE: P  ) , which churned 287% of its share allotment on the first day it went public.

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.

China-based Renren (Nasdaq: RENN  ) , the so-called Facebook of China that has had trouble controlling its rising expenses, and Zynga (Nasdaq: ZNGA  ) , a unanimous duck-and-cover selection of the TMFYoungGuns that derives the majority of its revenue from Facebook, both were taken to the woodshed on Friday. Neither move was really that surprising, given that many investors purchased these stocks merely to get exposure to Facebook. With the company now public, the euphoria of owning a Chinese company that can't control expenses and a gaming company that's going to need to spend an exorbitant amount of money to produce new social-media games just isn't as appealing as it used to be.

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.

While Facebook may or may not be right for you, our team at Motley Fool Rule Breakers has discovered the stock you should be looking into instead. Get access to our latest free special report; but hurry, it won't be free forever!

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of LinkedIn. Motley Fool newsletter services have recommended buying shares of LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that you can proudly give a thumbs-up to.


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  • Report this Comment On May 22, 2012, at 12:17 AM, SuntanIronMan wrote:

    "I'd be willing to bet my right arm that more investors didn't read the Facebook prospectus than did."

    That's an easy bet to win. Couldn't you say that about any and every IPO prospectus?

    Though I'm not sure if I understand you larger point (in #1). If they investors (or traders) were willing to buy shares at any price, why did the IPO trade basically flat the first day? Obviously some of that has to do with the trading problems that day, but seems like investors weren't that emotional.

    Last week, a few pundits and guests on the talking box in my house predicted that shares could possibly trade as high as $80 the first day of trading. Seems like maybe pundits were emotional, while investors, those not appearing on TV to make headline-making quotes, were reasonable.

  • Report this Comment On May 22, 2012, at 12:29 AM, TMFUltraLong wrote:

    Whichstockswork,

    I would argue that we're still two full trading days passed the debut of Facebook, and some investors still don't have order confirmations of whether or not they own shares as both unbelievable incompetence, and a sign of emotional buying.

    That level of confusion can only be created because of such a large influx of orders, both buy and sell side.

    i do whole-heartedly agree that most media outlets beat the door down on the Facebook IPO and tried to pump the public up about it.

    TMFUltraLong

  • Report this Comment On May 22, 2012, at 12:47 AM, SuntanIronMan wrote:

    I'm not sure not knowing if you are long or short the stock is a sign of emotional buying. I see that a sign that Nasdaq effed-up big time. Sure, it could have been a large influx of emotional buying and selling that caused the trading problems... or it could have been cause by extreme-incompetence on Nasdaq's part. Like BATS-level of incompetence. I'm willing to bet on incompetence. Incompetence is almost always a good bet to go with. When in doubt, go with incompetence.

  • Report this Comment On May 22, 2012, at 1:14 AM, TMFUltraLong wrote:

    The BATS debacle is definitely a Gaffe of the Year candidate... I wasn't aware that you could just withdraw your IPO if you didn't like the way the cookie crumbled.

    TMFUltraLong

  • Report this Comment On May 22, 2012, at 11:42 AM, pondee619 wrote:

    "Underwriters did a good job" WHAT??

    "Facebook Bankers Secretly Cut Facebook’s Revenue Estimates In Middle Of IPO Roadshow"

    http://finance.yahoo.com/blogs/daily-ticker/facebook-bankers...

    "Reuters' Alistair Barr is reporting that Facebook's lead underwriters, Morgan Stanley (MS), JP Morgan (JPM), and Goldman Sachs (GS) all cut their earnings forecasts for the company in the middle of the IPO roadshow."

    "But, just as important, news of the estimate cut was passed on only to a handful of big investor clients, not everyone else who was considering an investment in Facebook"

    Yep, the underwriters did a great job of withholding material information from the general investing population while diseminating it to the "BIG BOYS".

    Is this what you call a "Good Job" Sean?

  • Report this Comment On May 22, 2012, at 1:03 PM, TMFUltraLong wrote:

    pondee619,

    That story came out well after I had written this particular article. What the underwriters did in this aspect is unforgivable, however I still feel they priced the issue appropriately given the information we had available at the time.

    TMFUltraLong

  • Report this Comment On May 22, 2012, at 1:42 PM, pondee619 wrote:

    Given the information WHO had available? The underwriters, the general public or the privliged few? Did they really price the offering "appropriately" given the cut in the earnings forecast that they made and share with only the few?

    So, THEY, the underwriters, priced the offering correctly based on what WE, the general public, had available, even thought THEY knew that what WE had available information was not correct as the correct information was given to only a choosen few?

    Shouldn't they be pricing the IPO price on THEIR information and not on what "WE had available at the time"? Particularily whan THEY are unforgivably withholding the information.

    This is still what you call a "good job" Sean?

    Regarding the timing of the articles, don't you change your mind when new information is presented, or the infromation available changes, or do you steadfastly keep to your conclusions. When the facts change, Sir, I might change my mind, what do you do?

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