Facebook’s share has dropped by more than 30% below its listing price, and has shed about US$30 billion to US$35 billion of its value since its IPO (initial public offering) on May 18. The stock reached an all-time low of US$25.87 on June 5, 2012.

There have been many reasons cited for Facebook’s “debacle”. Some believe it was caused by the company’s failure to disclose poor advertising revenue to investors just prior to IPO. Others blamed the operators of the Nasdaq stock market for failing to properly process buy-sell transactions on the day of the IPO.

Some even blamed the underwriter, Morgan Stanley, for its poor handling of the whole IPO process.

Clearly, early investors are not happy. But who can blame them? After all, they have lost a third of their investment in less than a month.

In an effort to recoup some of the billions lost, investors have filed three separate lawsuits against Facebook’s management, accusing the company of favouring large, institutional investors over small, individual investors in its information disclosure.

Many claimed that institutional investors were told about the company’s poor second-quarter financial performance well before the information was released to the general public. This selective disclosure appeared to expose a regulatory loophole in the US, and has created an outrage among the investment circles.

Some market commentators are now calling the Facebook IPO “one of the biggest opening flops in stock market history”. There are also whispers among traders that perhaps another dot-com burst is around the corner.

But what are some of the lessons investors can learn from this?

1. How much you pay for a stock matters
It does not matter how great a company appears, your “entry point” will determine the profit you will ultimately get. Facebook’s share was listed at about US$38 apiece, which was around 88 times its earnings over the preceding 12 months.

By comparison, the industry norm for technology companies is a share price of around 15 times earnings. Which means to justify its initial price, Facebook needs to aggressively grow its earnings – by 5 to 6 times.

2. A sound business model is key
While no one can dispute the tremendous job Mark Zuckerberg and his team have done in accumulating users and keeping them engaged, Facebook is still in its infant stage when it comes to monetising its user base.

The social network also continues to face challenges to earn revenue from its mobile platform, which Zuckerberg acknowledged is a significant focus of the company, going forward.

3. Be cautious of what is “sexy”
Facebook is without a doubt one of the most hyped-up IPO stocks this year. You did not need to understand business or financial models to sense the hype around the stock just prior to its IPO – virtually every media outlet had a piece or two about the company.

But like all investments, it’s never a good idea to buy into hype. Just look at last year’s most hyped- up Internet IPO – Groupon. Its price has fallen by more than 50% since its IPO late last year.

The jury is still out?
It’s still too early to say how an investment in Facebook might turn out. After all, investments are typically made for the long term, and it’s only been three weeks since the company’s IPO.

For Malaysians that did not manage to get a piece of the company since its IPO, but would love to own a part of Facebook (at some 30% discount!), be sure to check out our comprehensive step-by-step guide on how you can buy shares in Facebook.


Source: Free Malaysia Today







 

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