It was a huge relief this morning when Facebook stock opened a modest 10% above the IPO price.This price level was ideal for almost everyone involved–with the exception of short-term traders who bought the stock only to instantly flip it. (And no one should cry for them).
With such a modest pop, Facebook and its selling shareholders did not leave tens or hundreds of millions (or even billions) of dollars on the table–an expensive mistake that most companies make.
When LinkedIn went public, for example, the bankers underpriced the deal, and the company needlessly handed $100+ million to institutional investors.
Individual investors, meanwhile, weren’t sucked into buying Facebook stock at a truly ludicrous “pop” price shortly after it opened… only to get creamed over the ensuing months as the hype faded.
To be sure, at ~$40, Facebook is still a very expensive stock.
It’s trading at about 65X this year’s estimated earnings of $0.60, and about 55X next year’s estimated earnings of $0.75. This compares to about 13X earnings for Apple and 19X earnings for Google. So there’s still plenty of downside.
But at this price, Facebook at least has a chance of being a solid investment going forward. (If it had opened at $70 or $80, growing into that valuation would have been almost impossible).And ~$40 was clearly the price that the market was willing to pay for the stock. So, Facebook and its shareholders got nearly the full market price for their shares, and investors who are buying in the public market aren’t having to pay much more than that price.
Lastly, the muted “pop” will discourage clueless investors from playing future IPOs just because they’re IPOs. Buying any stock is risky. And the moment it begins to seem like a guaranteed windfall, as it does when there’s a big IPO pop, too many people rush in without appreciating these risks.
So, kudos to Facebook and its bankers for perfectly pricing this deal.
Today could have been a disaster.
Instead, it has worked out nearly perfectly for all involved.