Facebook IPO: Once Again, Wall Street Wins, Muppets Lose

By EconMatters

We warned of a social network tech bubble 2.0 over a year ago due to the hype and overvaluation of Facebook based on the reported deals by Goldman Sacks and a Russian investment firm--Digital Sky Technologies on the secondary gray market. At that time, the two deals valued Facebook at about $50 billion, with a 100+ price-to-earnings (PE) ratio.

Fast forward to 2012, Facebook actually went IPO on May 18 with a similar lofty vaulation - the $38-per-share IPO price valued Facebook at $104 billion--100+ times historical earnings (the company's profit for 2011 was $1 billion). Facebook stock has since plummeted 27% to $27.72 from its initial $38 a share. Bloomberg estimated the stock would need to sink another 20% to match the average PE ratio for the Nasdaq Internet Index based on estimated earnings in the next 12 months.

The technical glitch on NASDAQ aside, many have blamed the so-called "botched" IPO event on stock mis-price or overvaluation. On the surface, it may seem like a simple mis-pricing by the main underwriting banks and Facebook. However, judging from the sequence of reported events (see timeline below), instead of a "botched" event, the IPO is actually a total success by Wall Street standard, since concerted effort appeared to have been made to ensure an "acceptable" return for the insiders.

May 8: It was reported that Facebook "quietly" added E-Trade as one of the 33 underwriters just two weeks before the actual IPO, "making good on Mark Zuckerberg's desire to give casual [retail] investors the chance to participate", and that "the inclusion of E-Trade on such a high-profile IPO is unusual," although not unprecedented.

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