So here's what I would put on my own personal Facebook Timeline.
February: I write a column headlined "Why Facebook isn't a growth story," pointing out a slowing in sales and expressing deep skepticism about its long-term ability to monetize its massive user base.
Last Thursday: I write another column that, while reiterating those concerns, emphasizes that Google launched in 2004 at a price-to-earnings ratio that reached more than 250 in its opening months, compared to "just" 100 for Facebook. Perhaps you could buy Facebook, then, and not get burned.
Friday: Stunned at the flat performance of Facebook stock on its debut, I buy 50 shares for one of my retirement accounts at $38.01 (U.S.) each in the last minutes of trading.
Monday: I watch Facebook fall as much as 13 per cent and wonder why, now, the market is acting rationally about social media stocks.
I'm betting (a small amount) it won't last. I'm not going to run around stuffing my portfolio with Pandora Media Inc. , but I am rejecting the headline on U.S. cable channel CNBC's website Monday that said "Facebook's Stock May Keep Falling: 'There's No Bottom' " (Taken, it should be said, from a quote from Dave Rovelli, managing director of U.S. equity trading at Canaccord Genuity in New York.)
The issue of Nasdaq's order fulfilment problems, while frustrating to traders, doesn't strike me as the main issue here.
It was deeply unhelpful that Facebook's offering date ended up at the end of one of the worst weeks in the market in some time. The U.S. market indexes had their largest weekly losses since last November, noted Fred Dickson of regional brokerage D.A. Davidson & Co.
Worse, said Art Cashin, the head of NYSE floor trading for UBS in an interview with CNBC, U.S. trading volume increased every day, sequentially, while prices fell, a deeply bearish combination. That didn't happen even during the period when U.S. markets went from their 2007 top to their March, 2009, bottom.
Even as the market cratered, Facebook significantly boosted the size of its offering.
The company originally planned to offer about 10 per cent of itself, not an abnormally high amount. But at a $100-billion valuation, that's $10-billion in stock: 337 million shares at a range of $28 to $35.
The final count was 421 million shares, more than half sold by insiders, at the upper end of a $34 to $38 range. The combination of more shares at a higher price pushed Friday's offering to more than $15-billion in all.
Increasing the size and price of an offering is almost never a bearish indicator for an IPO, however; the opposite, a scaling back of size and prize, usually suggests a tepid reception.
But Facebook's decision to increase the size of its offering appears to have overwhelmed demand. Late Thursday afternoon, Dow Jones Newswires reported that Morgan Stanley, one of the lead underwriters, raised the amount of shares its retail investors could purchase in the IPO. Each account could get up to 5,000, a tenfold increase from the previous limit of 500.
So, for better, or likely worse, Facebook and its underwriters overestimated demand, and neither institutions nor retail investors have bailed them out. The big question now: Is this a short-term blip? Or is this the bursting of a bubble?
Francis Gaskins, proprietor of analysis site IPODesktop.com, believes "the bloom is off the social-networking rose."
LinkedIn Corp. went from $45 to more than $122 on its first day in May, 2011; Pandora, after doubling its offering price in June, 2011, traded up "just" 60 per cent on its debut day before closing at a modest gain. By December, Zynga Inc. was priced at the top of its range but closed down the first day.
"That was a different time in a different market," says Mr. Gaskins, who believes Facebook will trade down to $18 to $20 by year-end.
"The bankers learned after LinkedIn and others how to price better. The pops became less as the year went on, culminating in Zynga's [performance]"
At Monday's close of $34.03, Facebook trades at about 65 times forward earnings, per Standard & Poor's CapitalIQ. Groupon Inc. trades at a forward P/E of about 155; LinkedIn, about 125.
Here's the sign the pessimism has gone too far: A tweet on StockTwits, the Twitter-based investment commentary feed, suggested "the dumb money" is buying into Facebook while "the smart money" is buying Yelp Inc.
Hoo boy! Yelp, the free user-generated consumer review site, has no forward P/E because of projected losses, and trades at an enterprise value (market capitalization plus net debt) of 241 times its EBITDA, or earnings before interest, taxes, depreciation and amortization. (Facebook's EV-to-EBITDA is 27 – most companies are in the single digits – which seems absurd until you look at Yelp.) So, I'm not ready for a status update that says my Facebook buy was "dumb money." It will be interesting to see what my timeline says in six months.
David Milstead