[Infowarrior] - Facebook IPO: Once Again, Wall Street Wins, Muppets Lose

[Richard Forno]

Facebook IPO: Once Again, Wall Street Wins, Muppets Lose

Submitted by EconMatters on 06/03/2012 17:57 -0400

http://www.zerohedge.com/contributed/2012-06-03/facebook-ipo-once-again-wall-street-wins-muppets-lose
By EconMatters

We warned of a social network tech bubble 2.0 over a year ago due to the hype and overvaluation of Facebook based on the reported deals by Goldman Sacks and a Russian investment firm--Digital Sky Technologies on the secondary gray market.  At that time, the two deals valued Facebook at about $50 billion, with a 100+ price-to-earnings (PE) ratio. 
 
Fast forward to 2012, Facebook actually went IPO on May 18 with a similar lofty vaulation -  the $38-per-share IPO price valued Facebook at $104 billion--100+ times historical earnings (the company's profit for 2011 was $1 billion).  Facebook stock has since plummeted 27% to $27.72 from its initial $38 a share.  Bloomberg estimated the stock would need to sink another 20% to match the average PE ratio for the Nasdaq Internet Index based on estimated earnings in the next 12 months.
 
The technical glitch on NASDAQ aside, many have blamed the so-called "botched" IPO event on stock mis-price or overvaluation.  On the surface, it may seem like a simple mis-pricing by the main underwriting banks and Facebook.  However, judging from the sequence of reported events (see timeline below), instead of a "botched" event, the IPO is actually a total success by Wall Street standard, since concerted  effort appeared to have been made  to ensure an "acceptable" return for the insiders.  
 
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The popularity of Facebook as a social media and IPO pre-marketing pump has generated enough hype to ensure a larger than usual percentage of Facebook shares being held by individuals (most of them probably bought the stock because they have a facebook page without much further research.) 
 
Now, many of these investors who ended up holding Facebook stocks will have more to worry as its IPO lock-up period expires.  IPOs typically have a lock-up period of 180 days before insiders may sell their shares.  The lock-up period for Facebook, however, is only 90 days.
 
According to Sci-Tech Today, the first lock-up expiration of Facebook hits in less than three months, when 268 million shares are available for sale, or 1/10 of shares outstanding. In less than six months, 1.7 billion shares will be unlocked.  Furthermore, odds are good that Facebook will issue more shares to fund acquisitions such as Instagram to further dilute share price.
 
Some analysts now put a price tag of under $10 a share as a fair price for Facebook,while some others still give FB a BUY rating.  Our view is that until Facebook could prove itself as the next Google or Apple by its actual financial figures, or unless you are the one sleeps and swims with the Wall Street sharks, it is best to stay away from such unproven stock.
 
Regardless, many individual investors who got in on FB at close to its initial $38 a share are unlikely to see that price any time soon.  So once again, Wall Street wins, Muppets lose.