Facebook Inc. shares hit a record high on Wednesday, eclipsing the brief rally that followed their debut in 2012 and marking a big recovery from the bad news – and dismal share price performance – that followed.
After slipping below $18 (U.S.) about a year ago, or more than 50 per cent below the initial public offering price of $38, the social networking company looked like a dying fad from an investment perspective. Even as recently as June, when the shares meandered below $25, it looked suspect.
Now, Facebook is back. The shares touched a high of $45.09 on Wednesday (they closed at $45.03), slightly above the post-IPO high point of $45. They have nearly doubled over the past three months alone, thanks to rising advertising revenue on mobile devices.
1. IPOs are terrible. Facebook took a lot of heat for the way it, and its underwriters, managed its debut as a publicly traded stock. But in general, IPOs are rarely the sort of investments to jump at: Launches tend to coincide with ideal conditions and strong interest from investors, which often fades.
When it does, the shares stumble. Indeed, academic evidence suggests that IPOs underperform their peers in the three years following their debuts. Google Inc. is a an exception; Facebook isn't, or wasn't.
2. Bad news is often good news. When Facebook was down, everyone wanted to kick it – and corporate insiders, who had taken big stakes in Facebook before it went public, were among the naysayers.
It wasn't what they said, but what they did: They sold their considerable holdings well below the IPO price, after their lockup periods ended, suggesting they were keen to get out of the investment at any price. In the most notorious, eyebrow-raising example, Peter Thiel sold 20 million shares in August 2012 – and there were fears that Facebook founder Mark Zuckerberg himself could unload some of his considerable holdings.
However, the near-hysteria over this issue merely marked the bottom of Facebook's downward journey. Insiders have all sorts of reasons to exit a stock, and perfect market timing isn't one of them.
3. Don't sell low. One of the biggest beefs against Facebook in the months that followed its IPO wasn't so much that the company was failing to meet expectations, but rather that the share price was falling.
Perhaps some investors held on during these difficult months, clinging to their earlier belief that Facebook had a massive number of users, that it was making a lot of money, and that there was a big opportunity to make even more. But, surely, the declining share price pushed others into abandoning this bullish perspective.
It often makes sense to sell a stock if the reasons you bought it no longer exist. But if you merely follow the mood swings of the market, you could end up selling low and buying high.
Which, of course, brings us to today: With the share price in record-high territory, Facebook will likely attract new investors, who are looking to score on the stock's upward momentum. Let's hope they're not the same investors who sold their Facebook holdings when the shares were struggling to find friends.