Saturday, May 19, 2012


So, what happened to Facebook yesterday? The little company that had started in a college dorm room, had become a dominant player in the internet, had become a powerful icon of social media, went public yesterday after a couple weeks of hype and glamor.

The Initial Public Offering, where anyone could buy shares, was a huge event, characterized mainly by fizzle. That's the market at work, my friends and that's the way it is supposed to work. Investors took a look at the company, went through the analysis and decided that it wasn't worth what the hype said it was worth. From what little I'm reading about it, Morgan Stanley had to prop up the share price to keep it from going below the starting price of $38.00. Which means that Morgan Stanley bought a bunch of $38.00 stock that might not be worth $38.00.

It's a fairly easy initial analysis as I learned it in grad school. Take the net worth of the business, divide it by the shares of common stock, and you've got the supposed worth of one share of common stock. Investors buy and trade stocks based on a number of factors and their reading of the business climate. Sometimes a company is uniquely positioned to take advantage of a situation that would influence the selling price of a share, sometimes a company is in such a position that buying the stock is a bad idea. Sometimes an investor can make money on a stock, sometimes he'll lose his butt.

What happened to Facebook yesterday? The market decided what the company is worth. That's what the market is designed to do.

1 comment:

Rivrdog said...

Pull the trigger, sir.

Investors looked at the company and saw a fad, a product of young people's emotions, and one which they will either grow out of and reject or dump for the next internet fad.

The only thing sure about Facebook is the fact that when it goes away, the sound of silence from all the duped hypesters will be deafening.

Hint: never trust a CEO who doesn't know how to wear a suit or button his collar and two-block his tie.