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Facebook’s stock had been in a free fall since it hit the public markets.
This morning, it’s actually up, but the company isn’t out of the woods just yet.
What exactly is happening here? Why was the stock falling? And why does the IPO suddenly look like a disaster?
Some of you already know the answers to those questions. For the rest of you, we have this simple guide, which tries to the best of our ability to explain everything that’s going on in clear, plain English.
The one sentence explanation of all that’s gone wrong: Facebook’s stock fell almost immediately after it hit the public markets because investors just didn’t think it was a $100 billion company, and this has led to all sorts of other problems.
Here’s a more detailed explanation about everything that went wrong.
Facebook priced its IPO at $38 last Thursday night. What this means is that Facebook, along with its underwriters, the big banks that are running the whole thing, decided Facebook’s stock was worth $38 a share, which was a ~$100 billion valuation for the whole company.
When a company IPOs it sells its shares to big institutional investors and other clients.
Those clients can then take the stock they bought and sell it to the greater public, like you and I. They thought you and I were going to go crazy and buy the IPO at any price possible.
They thought we were going to buy it for, say, $75 a pop. We didn’t.
As a result, the stock didn’t pop. And those people didn’t get to make a bunch of money for free.
Naturally, this annoyed them.
But why didn’t we normal people buy it for $75 a share?
We can’t say with 100 per cent certainty because markets are impossible to fully understand, but here’s our best guesses as to what happened:
- The NASDAQ screwed up. The exchange that Facebook stock actually trades through was not ready for a huge volume of trading on Friday when the stock hit the market. As a result, trading didn’t start on time and when it did, the stock was at $42 to start. That’s a 10 per cent gain, which is pretty good for doing nothing, but investors are greedy and wanted more.
- There was a lot of Facebook stock available. The more stock supplied, the easier it is to meet demand. Since Facebook was offering a lot of stock, investors could easily get what they wanted at a price they liked.
- Facebook just isn’t worth $38 a share, and people knew it. Facebook’s current business is spectacular, but it doesn’t support a $38 a share price. Most people realised this so they didn’t buy the stock. For more, click here.
So, is this a total disaster for Facebook?
This part of it is not a disaster.
From Facebook’s perspective, this is actually a good thing. It got a good deal on its IPO. Facebook managed to sell its shares at a very high price, which means it got to raise a lot of money.
The investors who are crying now have no one to blame but themselves. Besides, they were just trying to make a quick buck flipping the company. Facebook’s stock could (should?) rise above its IPO price eventually. Investors who bought in at $38 will eventually be happy.
That said, there is a disaster lurking for Facebook.
Apparently, Facebook’s Chief Financial Officer, David Ebersman, told analysts at banks that they were being too aggressive in their forecasts with Facebook’s revenue and earnings. He told them to lower their guidance.
These analysts then reportedly conveyed this information to big institutional investors. This information was never conveyed to people like you and me in plain English.
This is why, even with Facebook’s stock up today, it still has a long road ahead.
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