Breakout

Facebook: The Worst IPO Ever?

Jeff Macke
Breakout

Shares of Facebook (FB) hit another record low, trading down over 3% today. The selling spree began yesterday with a 6% tumble to a record closing low of $19.87 a share. The sell-off is attributed to the expiration of the company's first lockup period allowing 271 million restricted shares to become eligible for sale by institutional holders. Facebook shares traded almost 10x average daily volume and struggled to find buyers for the last two days, suggesting the institutions in question, including Goldman Sachs (GS) and hedge fund titans Tiger Global Management could be dumping shares. (See: Facebook Shares Plunge as Insider Lockup Expires)

There's no objective measure for "worst IPO ever" but Facebook is the standard to which all future stock offerings will be held. Shares are down nearly 50% from where the IPO was priced on May 18th, but the money lost is what makes Facebook historically terrible. "$60 billion evaporated inside of 3 months; it's staggering," says Breakout co-host Matt Nesto.

The bulk of the $60 billion loss came out of the pockets of market newcomers in love with the idea of investing in Facebook or lured in by endless months of pre-IPO hype. Wall Street looks forward, not backwards, so the only thing that matters now is whether existing shareholders of Facebook stock should sell or consider this a buying opportunity on the seemingly endless drop in the share price.

"If you've held it from $38 to $20 and you haven't sold yet, why would you sell now?" Nesto says, offering what passes for a buy thesis on Facebook these days. There's not a one-to-one connection between the fortunes of a company and it's stock price. Particularly in the case of newly public concerns like Facebook, it takes time for a stock to find it's so called "right price." There's a case to be made that Facebook's stock is being impacted by artificial forces like yesterday's lock-up and the much larger one to come in November.

"The company itself hasn't really changed," Nesto offers. But this inadvertently touches on the bearish case. Facebook's lousy fundamentals became clear when the company had to open its books to go public. FB has slowing growth and no tangible plan to monetize its massive user base. We knew this before and it remains true today. Hoping Facebook figures out how to gather more than $4 per user in revenue per year isn't an investment thesis.

Those who've been long Facebook all the way down need to be honest with themselves. It's time to stop hiding from brokerage statements or convincing themselves that they "invest for the long-haul" so don't care about losses. Nothing is promised in life, including and especially Facebook's stock recovering. Those who are spending sleepless nights hoping and praying the stock will go higher own too much of it. They are bait to Wall Street sharks, whether they know it or not.

You can try anything you want on Wall Street as long as you have an exit plan. It's long past time for Facebook shareholders to start considering Plan B.

Do you think Facebook will end this year above or below its IPO price of $38 a share? Please answer our poll question below!

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