On Friday the 18th of May, Facebook launched their much-awaited Initial public offering (IPO) on NASDAQ. The share price of Facebook was priced at $38, and lined $16 billion into the war chest of the social networking site. However, as of Monday the share price of Facebook has dropped 11% with nowhere of a pop in sight.
The pop occurs when investors that didn?t get their hands on the stock at $38 start clamoring for it on the open market at a higher price. Google popped a good 20% during their IPO and investors were looking for this elusive pop to ride on Facebook?s stock price but it never came. I am going to talk about, the players, what caused this lack and how did Facebook get here?
The Rich List
The IPO launch a new boatload of billionaires/millionaires (complete real-time list here) notably:
- Mark Zuckerberg leading the way with $17 Billion
- Instagram got $782 million by virtue of a share swap earlier this year
- Winklevoss Brothers ? Who claims they invented Facebook got $204 Million
- David Choe ? Graffiti Artist that painted FB?s HQ and got stock for it ($161 Million)
The list goes on, but what is evident is that everyone that got in early got himself or herself some action.
Facebook’s Road to Riches
Here is a simplified timeline of how Facebook?s investors and respective valuation ballooned to this fat level.
Mark Zuckerberg, Dustin Moskovitz, Chris Hughes and Eduardo Saverin launch The Facebook from their Harvard dorm room.
Receives 500,000 from Peter Thiel (Clarium Capital) ? Now worth 948 Million
Hits 1 million users
Thiel and Accel Partners invest $12.7 million, giving Facebook an $87.5 million valuation. Number of active users: 5.5 million.
Microsoft invests a staggering $240 million (1.6% share) valuing the company at $15 billion
Hong Kong businessman Li Ka-Shing, invests $60 million and another 60 million in March 2008
Digital Sky Technologies (DST) invests $200 million with a valuation of $10 billion and buys 100 million worth of shares from employees that want to sell the in June 2009
Reports indicate Facebook’s annual revenues of up to $2 billion and profit of roughly $500 million.
January 2011 – Present
Goldman Sachs invests $450 million and DST invests $50 million, putting Facebook’s valuation at $50 billion. Cumulative funds raised, excluding loans: $1.3 billion. Facebook is sitting on $2 billion.
For Some – Greed is Good
The blame game has started on why Facebook?s share price has not pop and as of now its stock price been dwindling. Fingers are being pointed at Morgan Stanley ? the lead underwriters of the IPO. Being the lead underwriter means that they have to swallow up what shares remain at $38. That is the risk they have to take in exchange of the fat fees they charge. They also consult on all the aspects of getting Facebook to IPO including the price. It is reported that Facebook?s banks now own 86% of its stock.
A revised S-1 filing made with the US Securities and Exchange Commission disclosed that Facebook?s five key banks ended up owning $13.86bn. Morgan Stanley, its lead adviser, ended the day owning 162m shares, worth £6.16bn, followed by JP Morgan and Goldman Sachs, which ended the day with $3.2bn and $2.4bn holdings respectively. Bank of America Merrill Lynch and Barclays Capital each held $1.04bn stakes.
The Telegraph – Banks move in after shaky start to Facebook IPO ? 19 May 2012
Someone at the banks got too carried away with underwriting the largest IPO in history and probably overvalued the share?s price. Presently, the Price Earning Ratio (P/E) stands at 74. That means that it will take you 74 years to get your money spent buying the stock back based on Facebook annual earnings ? 74 years ? right!
So someone got greedy, but for some ? like the guys that got in early ? Greed is good. For the guys that bought Facebook on the day of the IPO ? its ?not so ? good.
My Thoughts ? Moving Forward
The rally that I thought would rejuvenate the stock market upon Facebook?s successful IPO didn?t come. Maybe they should have valued it a little lower for a pop. The rational is that the price would pop, everyone makes money, looks at other similar tech stocks (or any other stock) and fuel a buying frenzy. Things don?t always happen as they should and there is always a lot of what-ifs.
Moving on ? its good that we see some sense coming in from common folks in the market. Honestly, the recently inflated tech purchases (i.e. Draw Something, Instagram etc. etc.) has flamed talks of a bubble and bubbles hurt people when they pop. I for one, am glad that common sense kicked in on this Facebook IPO.
Facebook meanwhile has got a load of work ahead to proof its worth. They are listed now and have shareholders to report to. The only way to boost the share price now is to increase earnings (profits) or lower share price (something nobody that owns the stock wants) and since there is no clear competition for Facebook they have a bit of lead-time on working on that.
I think that Facebook have used they ?like? button to get them so far. Now that they are in a leage of the big boys ? its time to ?show investors the money?.