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Facebook Crashes Through IPO Price But That Doesn’t Make It a ‘Failure’

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Facebook (FB) traded sharply lower this morning, crashing through Friday's IPO price.

And this unleashed a new round of criticism and disappointment among investors who apparently thought they would get a lot of free money from Facebook just for participating.

There are two specific complaints about the IPO.

The first, that NASDAQ blew the offering and hurt investors when its systems failed to confirm trades, is a perfectly reasonable complaint. Investors deserve to know immediately when their trades are executed. And the fact that NASDAQ's system choked is a major embarrassment for the exchange. (See: Trading Glitches at Nasdaq Mar Facebook IPO)

The second complaint appears to be that investors didn't get as much free money on the IPO as they thought they would.

This complaint deserves much less (no) sympathy.


Because buying an IPO in expectation of a "pop" is speculating. And speculation has downside risk in addition to potential gains. And anyone who chooses to speculate should understand that.

On Thursday, Facebook priced its IPO at $38.

On Friday, the stock opened at $42, a 10% jump, and spent most of the day trading above $40. Then, thanks to heavy support from the company's bankers, the stock closed just above $38.

In other words, even after the sharp selling at end of the day, Facebook IPO buyers were better off than they had been the day before. And if they were among those who took the abundant opportunity throughout the day to sell stock above $40, they locked in a nice overnight gain.

But given the complaints about the small "pop," IPO buyers got less free money than they expected to.

The hope, presumably, was that--no matter where Facebook's IPO priced--the enormous demand from suckers would cause the stock to "pop" when it started trading--thus allowing the shrewd IPO buyers to flip their shares at a profit only hours after buying them.

Of course, that's exactly what the IPO buyers were given a chance to do. For about 4 hours on Friday, the IPO buyers could have locked in an instant 5%-10% gain (at least if they knew they owned the stock). But apparently this wasn't the 50%+ gain they were looking for. And this is where people need to take responsibility for their decisions.

The $38 that Facebook IPO buyers voluntarily paid for the stock--emphasis on voluntarily--was already an extremely rich price for a company with decelerating revenue and only ~$0.43 of earnings last year. The only way these buyers were going to get a big "pop" from that price was if other investors seeking the same instant riches were even more aggressive and reckless than they were.

And it turned out that those even-more-aggressive-and-reckless traders stayed home.

So Facebook IPO buyers only got their 10% instant gain.

And a lot of them, apparently, did not take the opportunity to lock in that gain. Instead, they held on to the stock, either hoping that it would trade higher (likely), or because they are actually long-term investors.

And now, with the stock crashing to new lows, the IPO buyers are blaming their decision to hold onto it on Facebook, too.

This is unfair.

Facebook could not have been clearer about how it was going to emphasize the long term at the expense of the short term, and that's exactly what it did in choosing its IPO price. Facebook now has a lot more cash at its disposal than it would have if it had low-balled the IPO just to give buyers a "pop." That cash is valuable to the company, and it will help the company create more value over the long-term.

In the weeks leading up to the IPO, moreover, many analysts screamed from the rooftops that Facebook's stock seemed extremely expensive. I even went far as to call it "muppet bait."

And when the stock opened on Friday at merely an extremely expensive price, instead of a ludicrous one, this actually came as a relief. Because it meant that millions of investors weren't buying it at absurd prices in the after-market... and thereby setting themselves up to get creamed when the hype faded.

Unfortunately, there's no free lunch in stock speculation.

And the good news is that those who bought the IPO because they do, actually, want to invest in Facebook long-term, now have the opportunity to buy stock at a considerably lower price.

More Facebook coverage:

So, Now That Everyone Has Sobered Up, What Is Facebook Actually Worth?

"Crisis Meltdown" at Nasdaq Mars Facebook IPO

Facebook IPO Latest Blow to Investor Confidence

Facebook Effect: How The Social Network Changed the World