Monday, May 21, 2012

Facebook IPO illustrates widespread misconceptions

Facebook IPO'd yesterday, and there was a lot of ink spilled about how little "pop" the stock experienced on its first day of trading. It closed up just a fraction over its IPO price. Many people greeted this a sign that Facebook or the IPO had problems. That's nonsense. It shows that the stock was priced almost perfectly (from Facebook's perspective).

The perfect price for an initial offering is very, very near the end-of-day equilibrium price. Anything less is leaving money on the table. That's what the brokerage house managing the offering, and their favorite customers, want, but there is no reason for the company going public to do them any special favors. The price needs to go up, just a little, to ensure that the offering is fully subscribed. But that's all.

Then today the stock was down 12%, on a day the overall market was up. My interpretation--the lack of an obvious bubble was enough to torpedo the stock. It reminds me of the sadly funny Onion headline from a few years back: "Recession-Plagued Nation Demands New Bubble To Invest In".

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