Phuket Business: Why Facebook was never a sure thing

PHUKET: Personally speaking, I have never been one to jump on the Facebook band wagon. I just do not get the whole ‘let the world know what you are doing on an hourly basis’ scenario.

Don’t get me wrong, this is a very useful application when, like ourselves, we enjoy the sun-soaked shores and we want to keep in touch with friends and loved ones back home.

Facebook has grown to become the largest social media network site in the world and, with over 900 million users worldwide, its potential seemed endless.

However, following its recent IPO, Facebook’s stock price dropped in value. Was this unexpected?

Facebook, on one hand, would seem like an advertiser’s paradise, access to 900 million people in one swoop. What went wrong?

We have to ask where do Facebook’s profits come from? They don’t charge subscribers so practically all their income comes from advertising. The last time I logged on to Facebook, there weren’t the usual pop-ups that you would normally get from other websites.

Initially valued at between US$28-$35 per share, it seems that this valuation was severely overpriced and gave Facebook a value of US$105 billion.

When the share price dropped as soon as it began trading, it was evidence that investors didn’t believe Facebook is a US$105 billion company.

If we look simply at Facebook’s price to earnings ratio, at $38 a share, Facebook has a P/E (a measure of how much profit a share buys) of almost 100 times the projected earnings for the next 12 months.

By comparison, Google Inc. trades at 13 times the projected earnings. Subsequently the
initial IPO offerings saw the share price drop by 25% for some investors.

As the stock fell, there was a long list of questions, ranging from whether the underwriters priced the shares too high to how well prepared Nasdaq was to handle the biggest Internet IPO ever.

“It was just a poorly done deal and it just so happens to be the biggest deal ever for Nasdaq and they pooched it. That’s the bottom line here,” said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

An IPO ought to leave investors confident that the system of share allocation is fair, the price is right, and the company is forthright. The Facebook IPO achieved none of these goals.

The good news is that individual investors who were denied a piece of the IPO can now buy Facebook shares for about $32 as of May 24th.

But, as with all stock picking, if this episode should teach us one thing, it is that due diligence needs to be done on any stocks that you may be intending to buy.

As this has shown us, even the largest of companies, and what many people deem as
being a safe bet, isn’t always a sure thing.

There is no such thing as a sure thing. As markets remain volatile, there are still good stocks that can be had at the right price.

However, this is an area where expertise needs to be sought, as a few wrong picks could mean a significant loss.

For more information regarding this article please contact: Alyman@montpeliermalaysia.com
Anthony Lyman is a Senior Financial consultant for the Montpelier Group

— Anthony Lyman