Call my Lawyer, Facebook didn't Double in a Day
Moustafa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since Facebook’s (NASDAQ: FB) IPO and after the first day of trading closed, there has been streams of complaints, articles and reports that not only are investors unhappy but investigations and now lawsuits are under way. Investors seem to be furious they lost money by purchasing shares of a company during its IPO.
Is this actually happening? I always thought that was the risk with IPOs. The blame has been pointed at the underwriters, especially Morgan Stanley (NYSE: MS), Facebook itself and NASDAQ.
Firstly, there was a consortium of banks underwriting the Facebook IPO led by Morgan Stanley. These underwriters working in conjunction with Facebook and major investors set the IPO price at $38. After the first day of trading the stock stood just over that price. It seems to me the got it pretty bang on, and the last time I checked there were three routes an IPO could take: up, down and stay the same. None of these are ever guaranteed.
A report has come out stating that Morgan Stanley and the consortium of banks had reduced their earnings estimates, highlighting a slow down in the company's growth. This seems very responsible to me, especially since Facebook has a very complicated business model when it comes to growth.
The question is what is most important to Facebook -- growing revenues per user, revenues per advertiser, or their user base? Obviously, the easy answer is all three, but what will lead to the biggest impact on their overall share price moving out of the second quarter? Looking at the updated range of estimates, they were 4.85B from Morgan Stanley on the high side to 4.815B from Bank of America on the low side. Seems all four of the major banks were very close to one another upon their updated estimates. The problem then was some investors didn’t feel they were properly informed of this update, yet Morgan Stanley had adjusted their predictions by just 5%.
When it’s boiled down, this brouhaha over Facebook comes down to the missed expectation that this was a guaranteed play to make a quick buck on the IPO. The argument that investors were not properly informed is ludicrous; it was impossible not to open any type of media without reading about the upcoming IPO and where the company stood almost on an hour-to-hour basis. Leading up to the IPO, the stream of reports was pretty similar in that no one expected a huge rise in share price and that there was going to be a lot of volatility around the stock. The stock is down 15%. If you believe in the Facebook story, you should not be swayed by this kind of drop, especially since nothing else about the company has changed in 48 hours.
The idea that Morgan Stanley botched the IPO is correct in that they agreed on a price that was too high, but that is the risk of an IPO. On the flip side of that coin, should LinkedIn (NYSE: LNKD) sue their underwriters when the stock doubles and they don’t get access to that capital that realistically was priced into the market? The simple answer is of course not. LinkedIn made good money for investors that bought at the IPO price and I agree with the Fool that moving forward the company has great growth prospects and multiple revenue streams to capitalize on.
To be honest, I feel the same way about Facebook. The only reason I stayed out of the IPO was because I felt that the volatility was going to cause price swings that I couldn’t even come close to predicting.
The NASDAQ exchange had some computer malfunctions that delayed the IPO; investors are coming out now and saying they were unable to cancel their orders in a timely fashion. This is fair, and those investors who can prove they attempted to cancel buy or sell orders should be refunded the price they paid for the stock by NASDAQ. Other than this situation, I see the other lawsuits as frivolous attempts to cover poor decisions.
I hold shares in Research in Motion (NASDAQ: BBRY), a company that, unlike most people, I do still like. I purchased shares in the low $20s (cue pointing and laughing) thinking that the stock was not going to continue to plummet. I didn’t know at the time there was going to be another delay to their OS and long time executives departing. Can I sue them for making a poorly timed investment decision? No, I can talk about it and be laughed at for purchasing those shares at that price, shares I continue to hold (if you can believe it) because I still think the company moving forward is a $40 stock.
Facebook as of Wednesday May 24, 2012, sits at $32, according to Google Finance. I feel this is a good entry point for the stock but I am going to attempt a different strategy closer to the second earning report. I am going to engage in an options strategy with limited risk. Since I believe there will be volatility around the second quarter earnings, I will attempt to enter into a long straddle to take advantage of this volatility. This is when you buy equal amounts of calls and puts at the same strike price and expiration date. Your only risk is the price you paid for the options, and you make money if there is a big bounce either way in share price.
Since Facebook options have not been offered yet, I must still wait and see if this is a viable strategy. If there is a huge premium attached to these options it will make the idea less interesting. The higher price you need to pay for the calls and puts the more the stock needs to jump for you to profit. If you think I’m going in the right direction, crazy, wrong, or crazy and wrong, let me know.
mooseelz owns shares of RIMM. The Motley Fool owns shares of LinkedIn. Motley Fool newsletter services recommend LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.