I just did a FOX Business interview about Facebook. I am tired of writing and talking about it as much as everyone else is tired of hearing about it. So I am going on Facebook hiatus for a (long) while. My last comment will be this. I got a question from a reader asking me if my two articles were contradictory to each other. On May 18, before the IPO, I wrote that Facebook stock was overvalued, while last week I wrote that Facebook’s valuation at IPO was fair. Those statements are not contradictory. The first article was making a point about the fundamental valuation of Facebook, while the second dealt with the company’s valuation on the day and in the early hours of the IPO. The valuation at IPO is independent of a company’s fundamentals: The underwriter’s job (if they are truly working for the IPO company) is to set the price as close as possible to where the supply and demand balance is.
As Ben Graham put it, in the short term the stock market behaves like a voting machine, but in the long term it acts like a weighing machine. At IPO the price is truly set by ‘votes,’ not weighing (i.e., fundamentals).
It truly amazes me how brainwashed investors and media are about what is considered to be an IPO success. The LinkedIn IPO was considered to be a success because the stock doubled in the first hours of trading, but I look at it as a failure, because the insiders got ripped off. Speculators are upset about Facebook’s IPO because it had a good opportunity to become a momentum stock, and it did not. My analogy would go like this: Imagine a plane taking off from Denver, a mile above sea level. The passengers all know that its destination is NYC, at sea level — but they are hoping it will get there by going through the stratosphere first.
