Much is being made about whether the Facebook IPO was a flop or not. There are two camps to this. The “it was a flop” group point to the fact that there was no sustained “pop” to the price, since the shares closed at just around the original IPO price of $38, and “only” managed a high of $45 for the day. The “not a flop” faction points out some of the issues in pricing the IPO in the first place, and why it may have been priced the way it was. So, was it a flop or not?
Share Price and Future Value
Some of this requires visiting what the price of a particular stock means. For many, it is the future value of the company. For others, it is the current value of the company, although what I would say is that this is simply “future value”, just with a very short timeframe. What would “future value” mean? It depends on the investor. Someone looking to make a small profit off of a quick price bump (or drop if you short), then “future value” could mean a few minutes or an hour from now. For a “buy-and-hold” investor, the “future value” would mean the value of the stock some number of days, weeks, months or years into the future, again depending on how long you expect to hold the thing.
Is Facebook, on paper, worth $100 billion right now? Not hardly. They don’t have the current revenue or profitability to justify that kind of valuation. Could Facebook be worth $100 billion at some point in the future? I would say that it has a very good chance of being worth that down the road. As always, there are caveats, that largely depend on what Facebook does as an organization. In its current form, and following its current model (get more accounts, play more games), it may not get there. But should Facebook find ways to expand or add new and compelling features, then yes, I would say $100 billion would be in their future.
So Why Price It High?
And therein lies, from what I can see, one of the real reasons for the $38 share price: it has turned Facebook into a long-term bet. Had the shares been priced at a more sensible $4/share or something like that, then there would certainly have been room for a more sustained price increase. But pricing at $4 would have failed to accomplish another objective.
There is a second reason for putting a relatively high number on the stock: to get as much cash now as is feasible, which can be used to potentially grow into the current share price. If you are looking to either expand your talent pool, or acquire companies that have technology you can use, you need cash. Yes, Facebook now has stock that can be used to make deals, but cash works really well. Investors that have backed a small business that Facebook wants will be happy to receive cash for their exit. Sure, most would also take shares, but share value isn’t nearly as stable or predictable as good ‘ol dollar bills.
More “Not A Flop”
For Facebook, the IPO did what it needed to do. For those that participated in the IPO, the level of success on Friday depends on your perspective. For any looking to see major gains in the first day of trading, naturally they would be disappointed. For those that received their shares in the “early days”, it was a windfall, likely beyond most of their imaginations. For patient investors (and it will require a great deal of patience), it was probably “okay”. The IPO may not have been a resounding success in many ways, but I wouldn’t call it a flop.