Why Facebook’s Plummeting Stock Price Is a Good Sign
Business + Economy

Why Facebook’s Plummeting Stock Price Is a Good Sign

TFT/Reuters

Facebook (FB) stock tumbled again Tuesday – and despite the hue and cry that has intensified as the share price has deteriorated and as more and more revelations emerge about the IPO process, the slide is not necessarily a bad thing.

The stock, which went public at $38 a share and opened for trading Friday at $42, has since plunged more than 25 percent to close Tuesday at $31.12. Facebook, which had been valued at $104 billion, is now worth $85 billion – still well above the value some pre-IPO analyses assigned the company. 

Admittedly, the steep drop so far has been painful for more than a few on Wall Street. The stock’s weakness has fueled criticism of the Nasdaq exchange, which experienced trading glitches, and the underwriters, particularly Morgan Stanley (MS), which has come under attack for its pricing of the IPO, for increasing the amount of shares sold in the initial offering – and, as Reuters reported on Tuesday, for cutting its revenue forecasts for Facebook just before the company went public. The heads of the Securities and Exchange Commission and the Financial Industry Regulatory Authority said Tuesday that they would be looking into the IPO and those related issues.

So what’s good about this whole mess? While it harkens back to the days of the Internet bubble in some ways, in others it actually suggests that Wall Street and investors have made considerable progress since the days of the dotcom boom and bust.

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Consider the Morgan Stanley imbroglio, for example. Following the release of an amended S-1 filing by Facebook that raised questions about Facebook’s ability to monetize a growing number of mobile users, Morgan Stanley analyst Scott Devitt reportedly lowered his outlook for the company’s revenue. That move, coming as it did just ahead of Friday’s IPO, apparently “freaked a lot of people out,” as one investor told Reuters.

The most disturbing aspect of Devitt’s move – and of similar revisions that were apparently made by his counterparts at JPMorgan Chase and Goldman Sachs, also major underwriters of the deal – is that the information wasn’t disseminated to the public at large but only to select large clients. That merits investigation by the Securities and Exchange Commission.

That question of selective disclosure is huge – but wouldn’t it be worse if the analysts had all painted overly rosy pictures of Facebook’s business for the purpose of luring more buyers, or future IPO clients? If Devitt had just been looking to curry favor for the bank, perhaps he would have held off – unless, of course, that caution was precisely the message Facebook intended to spread with the changes it made to its prospectus. As it is, the downward revisions made at a sensitive time can also be seen as a sign that the analysts weren’t kowtowing to investment banking clients and pumping up Facebook’s prospects at the expense of the investing public – or at least selected clients.

The fizzled IPO is also a sign that some investors – not all – remember the lessons of dotcom bubble. Remember, it wasn’t all that long ago that investors lined up to buy any buzzy Internet company and fundamental metrics like revenues and earnings were tossed aside for companies like Facebook. Internet businesses going public just needed “eyeballs” and maybe a cute mascot. Stock touts openly talked about the Greater Fool Theory, which holds that it doesn’t matter if a stock is overvalued as long as you can profit by selling to the next sucker.

Facebook certainly has the eyeballs, with 900 million active users a month as of March. And it comes close enough on the mascot front: CEO Mark Zuckerberg’s adorably shaggy white dog, Beast, has his own Facebook page with some 567,000 “Likes.” And sure, the Facebook frenzy still infected plenty of people. Many mutual funds and other institutional investors had already picked up Facebook shares on secondary markets well before the IPO, yet the underwriters were only able to boost the target price and the number of shares being sold because they saw enough people clamoring for the stock. Some brokers reportedly complained that they were allocated more shares than they expected – meaning in some cases they may have ordered more shares than they really wanted, thinking that the supply would be limited, but then were surprised that their orders were filled. Certainly more than a few traders were banking on being able to flip whatever shares they got for a quick profit.

So yes, the IPO has been a debacle, and the legitimate problems at Nasdaq and the investment banks will no doubt need to be addressed by the companies and their regulators. But the nearly $20 billion in market value that’s been wiped out in two days is also a sign that many investors approached the IPO with a healthy degree of skepticism and that bubbles just don’t last as long these days. Nasdaq can have Mark Zuckerberg ring the opening bell from Facebook’s campus and CNBC can air wall-to-wall coverage of the IPO, but the stock has faded because investors are looking beyond the hype to the things that really matter, like how the company will make money and grow.

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