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Facebook: One honeymoon begins, another ends

india Updated: May 23, 2012 16:50 IST
Narayanan Madhavan
Mark Zuckerburg

For Facebook Inc’s CEO Mark Zuckerburg, the honeymoon has begun in his personal life. And it has ended on Wall Street.

It did not surprise many when Facebook shares tanked by 11% on the first day of trading on Monday after its listing day that saw the social network’s shares rise by 37 cents from the issue price of $38, propped by underwriters.

The IPO (initial public offer) of shares was itself a party marked by a scramble for pieces of the company. The only significant event that took place after the listing in the intervening event was 28-year-old Zuckerburg’s marriage to his long-time sweetheart.

It couldn’t be that bad for the shares, right?

So, what gives? Very simply, when underwriters step out, gullible retail investors are left holding the IPO baby. Rational thinking analysts used to historical earnings and earnings in the foreseeable future were always sceptical of the company.

Naturally. At $38 a share, Facebook with only about $4 billion in annual revenues was being valued at $104 billion (Rs. 571,875 crore)– and commanded a price-to-earning ratio of more than 100 when established giants such as Google and Microsoft were going at less than 20.



Some people called the IPO gold rush as “emotional trading” --- and it does not take a PhD to guess it was. It was all about pricing the vague future.

Now it transpires that in the run-up to Facebook's $16 billion IPO, Morgan Stanley, which led the underwriters, delivered some negative news to major clients – as if the left hand was taking away what the right hand gave. The bank's consumer Internet analyst, Scott Devitt, was reducing his revenue forecasts for the company.

Monday’s drop in Facebook's share price wiped more than $11 billion off of the company's market capitalization.

Stock markets have their own peculiar logic – much like conversations in a drawing room. When one extreme view is expressed (and the high price is only a view), other views kick in to tone it down. At some point the logic of relative valuation of similar companies are discussed. That can result in some readjustment of prices, as it seems to have happened in the case of Facebook.

Nevertheless, there is little doubt that Facebook is still sitting on a handsome valuation – something Zuckerburg & Co are still to do justice to. As he grows from a hoodie-sporting college kid who got lucky/rich to a CEO the Wall Street must take seriously, his talk of “social graph” must be watched by a walk that shows in financial results.

Also read: Facebook stock slide puts new pressures on company

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