What a relief!
This morning’s Facebook IPO could have been a disaster for millions for individual investors.
Because the hype around the IPO was so tremendous that individuals could have felt that they had to own the stock at any price. And this could have led to Facebook’s stock opening miles above the IPO price, at a level that would have been truly ludicrous relative to the company’s fundamentals.
And then, as has happened many times before, many individual orders could have been filled at $60-$70-$80 a share… only to see the stock collapse over the next few weeks and months as the hype receded and Facebook was no longer the market’s shiny new object.
But individual investors, it seems, have learned from prior mistakes. And Facebook opened a modest 10% above the IPO price.
This pricing was ideal for everyone involved, with the exception of short-term traders who bought the IPO just to flip it.
The small difference between the IPO price and the trading price means that Facebook didn’t leave hundreds of millions (or billions) of dollars on the table. And the muted opening also meant that millions of individuals didn’t get screwed buying stock from institutional investors capitalising on the “pop” to unload their positions.
At ~$40, Facebook is still a very expensive stock relative to the company’s current business.
It’s trading at about 65X this year’s estimated earnings of about $0.60, and 55X next year’s estimated earnings of about $0.75.
That means there’s still plenty of downside to the stock if Facebook’s business continues to decelerate.
But it also means that the stock is not likely to suddenly plunge 50%-80% as soon as investors wake up and come to their senses.
So, well done, individual investors! You kept your heads cool and didn’t fall for the hype.
SEE ALSO: Facebook Is Muppet Bait