Amid all the articles analyzing the Facebook (NASDAQ:FB) IPO, with all the very legitimate concerns about lack of disclosure by underwriters or procedural errors by the market on the day of the IPO, seems to be a core belief that investors who bought stock on the day of the IPO deserve to have profited. The stock should have been priced lower to enable it to rise on the first day, the owners or original investors should have forgone some of their profits, and the starting price should have been perfectly aligned with, or lower than, the ultimate market price. If the price had gone up by 50% on the first day, very few people would be complaining about disclosures or procedures.
Without taking away from the seriousness of the disclosure or procedural problems, I'd like to remind everyone of two things.
First point: Until the day of the IPO, the only people that truly deserve to profit are the founders, employees, and early investors. If others can profit too, great, but that doesn't mean that anyone else "deserves to."
The founders and employees built the company all the way up to whatever value it has on the day of the IPO. They gambled their careers on a company that could have gone the way of many failed companies. They made decisions that led to the company's succeeding where many others failed. They gambled their money on a company that could have lost it all. They worked their butts off to build the company. And they were lucky, and in the right place at the right time. Bottom line, whatever the company is worth on the day of the IPO, and (like any sales and marketing situation) whatever people were willing to pay them for the stock, the people that deserve to profit from it are the people that made it so.
Everyone who buys stock on IPO day deserves to profit from that moment forward, but not for the past that they weren't part of.
Some people are saying that it's common practice to price an IPO so that IPO-day investors can profit. But the company is going to need a lot of money until they achieve the profits that everyone's expecting, so it's hard to blame them for maximizing their own profits from the IPO. In fact, maximizing the cash that the company walks away with is exactly the company's job in managing the IPO.
Some people are saying that they feel deceived by the IPO price being set higher than we now see the market will support. But there were more than enough naysayers all along saying that the valuation was too high. Anyone with the brains to invest on the day of the IPO has enough brains to know that Facebook's valuation was higher than anyone could fully justify.
Second point: Facebook's prospects for the future haven't changed one iota.
Facebook's founders and employees have managed to build the holy grail of web sites: a "sticky" site that people go to and don't leave. A platform for third parties (like Zynga (NASDAQ:ZNGA)) to deploy games and other applications that keep people on the site. A communication channel that is increasingly replacing instant messaging and even e-mail. This is the site that Google (NASDAQ:GOOG) has still failed to build, because Google is great at giving people answers that take them to other sites, and not so great at services that keep people on the site.
Facebook has also built a site that knows so much about its users that it can select great ads. People are using it in a myriad of places and situations, including shopping, traveling, going out for the evening, and more, all of which give Facebook a chance to add in ads and value-added services.
Of course, Facebook has its challenges. One of the biggest is monetizing mobile use, both by moving games and applications onto mobile and by increasing the profits from mobile advertising. But in this they're not alone - there are dozens of companies betting the farm on mobile monetization.
None of this has changed by the stock price going from $38 to $32. None of this has changed period. Anyone who believed in the company's potential a week ago should believe in it now.
Google's stock price 2 weeks after it went public was 20% lower than it was a day or two after their IPO. But Google's price has done OK since.
I think that we're going to see exciting things from Facebook once the dust settles. Their IPO cash puts them in the big leagues for acquiring start-up companies, and they're likely to use acquisitions as a way to solve their monetization challenges. While the M&A options are even more endless than Facebook's cash on hand, here are a few predictions:
- A start-up with strong algorithms for targeting mobile ads to current location and interests. (Examples include Sense Networks and Nexage.)
- A start-up with a strong platform for inserting ads into mobile games and applications. (Examples include Inneractive.)
- A start-up for indoor location positioning, to enable location-based ad targeting, check-ins, and search to work in malls and other indoor places. (Examples include GloPos, Combain, Pole Star and Qubulus.)
- A start-up for finding products in nearby stores, to enable social network product recommendations to lead to real sales. (Examples include GPShopper, TheFind, and Goodzer.)
Whatever the future holds, it's that future that today's investors are betting on. The IPO profits go to those who gambled earlier, but the future profits have the same huge potential they always had. Be patient as the company learns how to leverage their "sticky" web site and incredibly pervasive use. If they manage to do that, the profits will come.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.