What the hell happened with Facebook’s initial public offering (IPO) and what is going on with its stock? Why are analysts, pundits, and dingbat cable news anchors losing their collective minds? Facebook, the world’s No. 1 website for social networking, went public last Friday, and almost immediately after Chief Executive Officer Mark Zuckerberg rang the NASDAQ bell, all hell broke loose. If you’re new to the world of stocks and investing, you may be wondering what the fuss is all about. Below we answer a few basic questions about Facebook’s IPO and explain the reasons for some of the drama that unfolded just days after the offering.
What exactly is an IPO?
An initial public offering is a big deal for a company as it is the first sale of its stock to the public. A huge amount of money can be raised in the process, and accordingly, public companies are subject to strict rules and regulations by the Security Exchange Commission. Going public is also understood to be a sales job; investors are not going to buy stock unless they believe growth is inevitable. However, growth happens over a period of years, not days. The fact that Facebook’s stock is down by three or four bucks less than a week after the IPO says little about what its value will be in the long-term.
Why is Facebook being sued by shareholders less than a week after the IPO?
Shareholders are suing Facebook co-founder and CEO Mark Zuckerberg, as well as one of the IPO’s underwriters, Morgan Stanley, claiming that the defendants “selectively disclosed” to “certain preferred investors” a “severe and pronounced reduction” in Facebook’s revenue growth forecasts. The general public was not informed when Facebook’s main underwriters, Morgan Stanley, JP Morgan, and Goldman Sachs — three financial institutions who are not exactly known for being forthcoming with investors — cut their estimates for Facebook’s second quarter and year shortly before the day of the IPO. The fact that they didn’t disclose that they had made this cut to anyone outside of a select circle of investors is what has people so pissed off. Not only was it unfair to other investors, it may have violated current securities laws. Since this news broke, the Security Exchange Commission has begun an investigation of Morgan Stanley. NASDAQ is also being sued by a disgruntled shareholder for a technical glitch that affected trading the day Facebook went public.
Can I buy some Facebook stock?
Sure! Facebook is trading on the NASDAQ Stock Market under the ticker symbol “FB” (we’re assuming “like” wasn’t available). If you didn’t get in on the fun last Friday, which is likely since IPO stock offerings are generally snapped up for an excess of thousands of dollars by brokers for already wealthy investors, then contact a reputable online broker and buy yourself a single share of Facebook stock. But unless you have the cash to buy several shares, you’re unlikely to see any kind of return on your investment. However, many diversified mutual funds will soon own the stock, assuming Facebook doesn’t go bankrupt paying legal defense fees. So if you are contributing to a 401k plan, you may end up with a piece of Mark Zuckerberg whether you want it or not.
Is Bono going to retire?
Before Facebook was an IPO, it was a private company. Back in its early days, Zuckerberg paid some people for services with stock shares in Facebook, including graffiti artist David Choe who spray painted the first Facebook headquarters. As the company grew, a handful of private investors, including one short, sunglasses wearing singer for a huge Irish rock band, were allowed to buy shares in the company. Thanks to Facebook’s IPO, the value of Choe and Bono’s shares are now worth billions. Can they sell these shares? Hell, yes! Zuckerberg sold 30.2 million of his 503.6 million shares this week for a gross profit of $1.13 billion.
How does Facebook make money?
Before investing in a company, even one as hugely popular as Facebook, you should know how it makes money. In 2011, 85% of Facebook’s revenue came from paid advertising, while 15% came from payments and other fees, including processing fees generated from the sale of virtual goods using Facebook credits. Some companies, including Netflix and The Washington Post, have and continue to buy advertising on the site, whereas General Motors made news recently for pulling their Facebook ad budget.
Will there be more ads on Facebook?
There are no pop-ups on Facebook … yet. But you may have noticed more ads taking up space on your “timelines.” After Facebook’s IPO, there’s more pressure from its investors hoping for a big return. However, monetization, particularly on mobile phone platforms, is an ongoing challenge for the site since more than half its users access it using a mobile device. And in fact, this lack of revenue is one reason Facebook’s underwriters cut their estimates right before the IPO. In the meantime, Facebook continues to try and reconcile its concern for the privacy of its users with a penchant for Orwellian ad placements.
What about the long-term value of Facebook’s stock?
Forgetting for a moment Facebook’s current legal woes, it should be noted that the long-term performance of a company’s stock has no direct correlation with its first week or even month of market performance. Anyone expecting a sudden and dramatic increase or decrease in the value of Facebook’s initial stock offering should instead consider a career gambling in Las Vegas. Business and investment analysts point out that Amazon.com’s stock, valued as of this writing at more than $200 a share, initially performed very similarly to Facebook’s.
Will Facebook still be around in another five years?
Will Facebook be around five years from now? That is the $66.3 billion dollar question. Some critics point to Google’s lackluster Google+ product as an example of how Facebook might not be able to grow beyond their own particular competitive niche. Wall Street is bullish on Facebook, but it is a company without historical precedent. Although analysts will try, it’s impossible to know for sure if Facebook is destined in a few years to go the way of MySpace or Amazon.com.