OPINION: Facebook's 45% stock slide: Investment lessons from its disastrous IPO

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The dramatic 45% slide in Facebook’s stock price following its much-heralded IPO offers some potent investment lessons for you and your clients.

Much has already been written about the Facebook IPO and the subsequent slide in its stock price. As to be expected the financial press has been awash with the ‘hindsight commentators’ offering their views as to how it was all so inevitable. Somewhat perplexingly I don’t recall that chorus being heard at all in the pre listing period!

Regardless, there are some salient lessons to be gleaned from the Facebook story insofar as it reinforces some fundamental tenets of investment risk management.

By way of a brief recap, the Facebook IPO at US$38 per share was the third largest IPO in United States history and priced the company at $US$104bn. Price support for the stock quickly began to wane and the banks who led the IPO ended the first day of trading holding 75% of the $16bn of stock issued that day as they moved into the market to support the $38 issue price. At the rime of writing the stock had lost 45% of its issue price of $38 per share.

The key question being asked is: how did the so-called experts and commentators get it all so wrong? For what it is worth I would suggest that once again the tendency to be carried along by the hype to the point where investment fundamentals are downplayed or ignored had a lot to do with it.

Fundamentally most internet based businesses, be they Facebook, Twitter or a simple app on a smart phone are all about distribution. The internet has opened up the potential of low cost mass distribution that could not have been dreamed of only ten years ago. The possibility of getting your product or service in front of literally millions of potential buyers has proved incredibly intoxicating and to be fair is an opportunity that in some cases has and will prove to be very profitable.

Unfortunately the development of these mass marketing platforms has become an end in itself which can lead to a laziness in strategy formulation and execution. That is a mindset has developed that developing a platform of users somehow automatically leads to revenues and profitability.


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