Diary of an IPO: The Setup . . .

Posted by on May 15th, 2012

The scenario unfolding with Facebook could not be more predictable (actually deja vu of the Internet bubble of 2000). As reported in the Wall Street Journal today, there is a frenzy going on to get in on the IPO. Demand has far surpassed supply, so what’s a banker to do – raise the stock price range, I mean the valuation of the company?  This is a basic economic principle… right?

But at whose expense are they jacking up the price?  It’s at the expense of the little guy who doesn’t understand the correlation between stock price and valuation. It’s at the expense of people like my grandparents who are in an investment club in Sarasota, Florida.  People who don’t fully understand the correlation between stock price and valuation are getting taken.

Other than this frenzy, what has changed during the past two weeks that would possibly justify an increase in the value of Facebook by billions of dollars?  Absolutely nothing. In fact, there has been an acknowledgment that the company’s growth strategy, especially with respect to the all important mobile element, is not sound.

Here’s my prediction: Facebook will crash and burn unless the company can better communicate where it is going with its business. And who will suffer as a result?  The little guy who doesn’t understand the correlation between stock price and valuation.  The person who is caught up in the moment of the frenzy and who purchases Facebook stock at what will probably be a high ($34 – $38).

Just wait until the company reports its first earnings as a public company – then you will see what I am talking about.  Groupon is not an aberration.