Facebook's (FB) shares, at Tuesday's close of $28.84, have fallen 24% from the $38 IPO price and 36% from the post-trading highs of $45. Many lament how this is a terrible result, which reflects the greed of Facebook's early investors and Morgan Stanley (MS) and will do further harm to the already damaged psyche of the retail investor. I would argue, however, that the Facebook share price implosion is actually a good thing, for the following reasons.
First of all, what damages investor psyche is investing at price levels that are greatly disconnected from an asset's intrinsic value and then losing substantial sums on those investments (e.g. what happened with the bursting of the Internet bubble of 2000 and the housing bubble of 2008). In order to avoid such outcomes, the bubbles themselves, need to be avoided. In this regard, investors need to learn that investing based solely on expected momentum, and absent fundamental value considerations, is essentially just gambling. If Facebook shares had soared, post-IPO, I believe that this momentum/gambling mindset would have been re-enforced. Because the shares did not soar; however, and, instead, fell to more justifiable levels, investors were taught a valuable lesson about the dangers of momentum investing.
Secondly, the purpose of an IPO should not be to enrich the privileged investors that are allotted shares in the offering. In fact, that is precisely the type of system that can actually damage the psyche of the retail investor, who may conclude that the allocations favor the institutional clients of the investment banks (giving them yet another advantage over the individual retail investor). When an IPO price is set closer to market levels, where one can effectively buy as much as they want at the market price (as is the case in the secondary markets), such suspicions and perception of an uneven playing field are reduced, giving retail investors more faith and confidence in the system.
The investment bank's job should be to facilitate a transaction where shares are sold at a price where initial supply meets initial demand. In that regard, no price is "too high" if there are sufficient investors willing to buy the allotted shares at the initially determined price. Conversely, the price is, in fact, "too low" if shares immediately trade up substantially because the IPO price was set at a depressed level that created an excess in demand over supply. In other words, a soaring post-IPO share price means that investor would have been willing to pay more; however, an imploding share price does not mean the opposite (that the price was above what investors were willing to pay) as investors actually did purchase at that level and only sold when subsequent trading trends didn't meet their expectations.
In summary, outside of the initial NASDAQ trading problems, I believe that the Facebook IPO worked just as it should have worked. The shares were sold at a price where supply and demand were more balanced and any money left on the table was minimized (although money was still left on the table, with the very brief initial "pop" from $38 to $45). Because much of the initial demand was seemingly from investors buying with the expectation of an initial surge, and without a fundamental belief or conviction in the valuation, the shares sold off considerably once share price gains failed to materialize in a sustained manner. This is the fault of the speculative investors and not the investment banks or the company, who sold shares at levels that were completely appropriate considering initial demand. Going forward, hopefully, a lesson was learned by some and Facebook's post-IPO share price implosion will serve to discourage this kind of speculative/gambling mentality and help allow for more stable and rational markets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
