Aswath Damodaran, NYU’s legendary finance professor, has gotten a lot of attention lately for calling Apple’s top and predicting how Facebook would trade on its IPO date.In a new op-ed for CNN.com, Damodaran addresses the idea that the Facebook pricing and offering was some sort of conspiracy cooked up by Facebook and its bankers to cash in by to screwing new investors.
“I don’t buy this story,” he writes. “First, unlike many others who have seen the crises of the last few years as evidence that bankers are evil, I see them more as inept. Facebook’s IPO is just proof that if you want something valued, you should not ask a bank to do it.“
As he sees it, it was in no one’s interest to intentionally overprice the stock. The bankers face major damage to their reputations, the Facebook insiders will have an even more challenging time unloading their shares, and the big institutional investors who reportedly had an informational advantage are facing huge losses.
So, why was the pricing so off? Damodaran explains:
I think the investment bankers priced the offering based on how shares of Facebook were trading in the private market and their assessments of institutional demand. I don’t think that revenue growth, margins, risk or any other fundamentals played much of a role in the pricing. I don’t fault them for playing the momentum game, but they played it badly.
So, rather than focusing on fundamentals, the bankers were looking at price momentum metrics, which Damodaran considers to be a considerably riskier exercise. In fact, the reason he dumped Apple was because it was looking much more like a momentum stock, rather than one that traded on value.