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Comment by AndrewDucker | Hacker News Reader

Looks like FB priced it perfectly - they made the maximum money they could out of it.

Was it not obvious in advance that FB was being priced such that the shares would be either flat, or decrease? The original investors have made themselves a fortune - and frankly anyone who invested heavily in a corporation at a P/E of 100:1 didn't think about it well enough.

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Anyone who invested doesn't care that it's down 8% today. Facebook's investors have always done extremely well, however, it appears that traders with a two day sell window have done extremely poorly.

I don't think they priced it right, a $30 sell price could have created a 13% bump today, a big gain on opening day can create demand from retail. It changes the whole story, Facebook should know well enough the social effects of perception, even though the fundamental story is the same. The idea is not to cash out on IPO day, it's to create a story of growth and success and then cash out a few days later as the growth has whipped investors into a frenzy.

It reminds me of my realtor who would put houses on the market extremely underpriced generate huge amounts of interest. A bidding war would ensue almost immediately amongst those emotionally attached to the 'great deal'. After the bidding war the seller would have an offer 25 to 30% higher than market. The internet equivalent is $300 ebay items listed for 99 cents. Facebook fucked the IPO up by failing to generate interest through a success story, it will recover though.

Honestly, if you're 'investing' for two days you're not interested in P/E but rather technical analysis and market sentiment, both of which are poor right now, as nothing fundamental about Facebook's business has changed in the last week.

I disagree. If I understand things correctly, the purpose of the IPO is to raise capital for Facebook. As such, if they sell the stock for $30/share, that's what they get. If the stock then goes up to $34/share, they don't get the extra $4. That goes to whoever bought it from Facebook and resold it. In effect, they would have raised 12% less than they could have.

On the other hand, if they sell the stock to the public at $38 and it drops down to $34, it's someone else that's out the $4. Sure, it may create some temporary negative publicity, but, as you stated, they will recover.

Kinda, I'm assuming that a portion of the IPO stock was from entities that owned the stock other than Facebook, eg. employees, early investors, etc.

If not those shareholders may also want to exit shortly after the IPO, creating a success story for the IPO should increase demand creating a better market for shareholders.

I do agree with you that in a market with rational agents and solely from the POV of Facebook, Inc. that they did the best thing, but I think in a market filled with irrational agents motivated primarily by price movements that it creates the wrong story for the next 3 to 6 months in the overall social context.

What they've created is dinner conversation about how Facebook is flopping and has provided lots of ammunition to the nay-sayers, rather than 'proving' the nay-sayers wrong.

I tend to see Facebook's business fundamentally as hype, people use it because other people use it, not because of some intrinsic thing that makes it better than any other social network. It's moat is it's userbase not it's technology.

It's like Coca-Cola, people drink Coke because other people drink coke, not because it tastes better than Pepsi. It's the fundamental reason why New Coke was a flop and Pepsi taste tests don't matter.

Look up what an IPO is. It is an investment round, not a sale of personally help stock. Most shareholders are forbidden from selling during the IPO period. And in FBs case, they would have gotten better deals on secondary markets before the IPO.

Mark Zuckerberg doesn't care about the Nay-Sayers. He's made it quite clear that it's his company, and he'll run it how he likes. He just got a huge wodge of money, and he can now spend it however he likes. A win all round, I'd say.

Unless it's your money he has taken. And you get no return on your investment. Why does he need that huge wodge of money?

The attitude expressed in your comment is really disturbing.

I really don't understand the investment here; it's a non-voting non-dividend share right? I've asked a few people to explain this without satisfactory answer; there is now absolutely no possible connection between the success of the company and the value of these stocks (unless Zuck decides to sell at least 7% of his 57% ownership, which seems like it will be approximately never) except that all the owners decide their stock should be priced relative to how well the company is doing and other people agree.

It seems like people are investing in what other people will be willing to buy this otherwise useless stock at, and those people are only willing to do it because of yet other people willing to buy it for the same reason. Is that not correct? Seems like an extremely bizarre form of "investment", it's betting on a horse, not owning a portion of a horse.

Zuckerberg doesn't own 57% of FB (that would have made him richer than Warren Buffet), he 'only' has a majority vote.

Minority shareholders can sue if directors breach their fiduciary duty to the shareholders as a whole. It is not strict democracy.

"It reminds me of my realtor who would put houses on the market extremely underpriced generate huge amounts of interest."

Different situation. Pricing the IPO lower (as others have pointed out) would bring less money to facebook. And of course in the case of real estate there is no obligation to sell even if someone offers the asking price or even over the asking price.

> The idea is not to cash out on IPO day, it's to create a story of growth and success and then cash out a few days later as the growth has whipped investors into a frenzy.

Facebook is in for the long haul. This IPO gave them a hefty bit of cash - we probably won't see the results in full for years to come.

My condolence for your losses ;)

Of course, Facebook and its original investors made out well. But a stock that immediately falls below its IPO price represents a failure of the underwriters, not of the company itself.

Basically, Morgan Stanley convinced a whole bunch of its most favored clients to buy a stock at $38 that was worth only $33 or whatever. Those are the people who got "ripped off", so to speak.

Morgan Stanley makes a ton of money this quarter, while telling their customers that they should stay in for the long term (5+ years). It is too bad those people are getting screwed by Wall St. But a fool and his money are soon separated, or whatever that quote is.

On the other hand: MS also spent ~ $3B providing a floor on Friday by buying up FB shares in the open market. Since FB is down 11%, they've already lost about $330M on that. Not chump change even for MS.

> On the other hand: MS also spent ~ $3B providing a floor on Friday by buying up FB shares in the open market.

You don't understand the greenshoe: MS didn't spend a dime. That money came from selling initial shares from the "overallotment". Essentially, suckers who paid too much.

If the price had stayed above the IPO, that money would have gone to FB. Since it dropped below, MS is plowing the money (on behalf of FB) into manipulating the share price.

Edit: My more detailed explanation here - http://news.ycombinator.com/item?id=3996536

The shares they bought were just to cover their short position. They didn't loose a bit, they just didn't profit even more (which they would if the share price would go up).

You mean they would profit more if the price would go *down? The way I understand it, you make money on a short when the price goes down because you can buy back the shares you shorted at a lower price.

No, see the link in the comment below. If the shares go up, the underwriter can close his short position by buying a number of shares from the IPO company, at the IPO price (which is below the market price), therefore effectively profiting.

I don't think it's legal for an underwriter to short the price of a security that they're bringing to the market.

That's simply not true. The SEC allows this behavior to stabilize the price.

http://en.wikipedia.org/wiki/Greenshoe

> Was it not obvious in advance that FB was being priced such that the shares would be either flat, or decrease?

Funny thing: All IPO's are priced by the sellers. If they get it right, all of them should have prices which then stay flat or decrease. It is the buyer's interest for the price to increase, a fact that seems to have been forgotten since the bubble V1.

Maybe now people will again recognize the IPO for what it is: A company begging for money.

FB only released not even close to 1/2 of their stock. The investors are still stock rich and won't sell off their shares yet. If they did, the price would tank to less than $20.

The investors will cash out, but they'll gradually release the stock to the public.

The problem is that the sheer number of shares that need to be bought won't have enough humans in our population to buy it at the price. So you're going to see this stock gradually tank as investors dump their shares into the public.

It's really a legal ponzi scheme - Facebook only makes less than 1B in real revenue and their cap is riding at 90B and falling.

You mean 1B in profit? FB makes 4b/yr in revenue and growing. It's just not growing fast enough to justify the market cap.

The market cap is for potential, not reality. It's a gamble, but IPO market caps are never about reality - they're always about getting money.

Plain English. Nice job.

Companies are allowed to carry high P/E ratios because they've recently undergone a period of exponential growth and people believe they can continue to execute at the same pace. Amazon (amzn) is the perfect example of a stock that continually exceeds people's expectations while carrying a high P/E ratio -- and the stock has responded accordingly.

From listening to Zuckerberg I think he's a true capitalist, more interested in creating long term value than making a quick buck. I'm sure he's not excited that some very hopeful people who believed in his company are hating him right now because his stock (temporarily) seems over-priced.

Problem is, when you hit 1 billion users, you've run out of "exponential growth" headroom. All you can do is multiply that by 6.5ish (therefore, linear growth), and even finding new sources of revenue doesn't get you exponential anytime soon.

Certainly, most future growth will come from extracting more cash from the pool of users (or people selling to them), not growing the pool.

I agree that most future growth will come from extracting more cash from their current pool of users, but I can imagine a situation in which new sources of revenue would lead to exponential growth.

The world economy has never seen anything quite like Facebook before -- that's why it's so exciting. They could become Google/Netflix/LinkedIn/Zynga combined. I'm not saying they will, but they've got the prerequisites: 1 billion active users.

They could become Google/Netflix/LinkedIn/Zynga combined

Or they could become the next AOL/Myspace/Friendster/Ning combined... (IMNSHO, that's at least as likely as the former).

Facebook has pretty accurate data on 1 billion people. They have not even scratched the surface of how they can monetize it. Think about the equivalent of Google Adsense, syndicated across the entire world wide web, but targetable by detailed and fairly accurate demographic and psychographic profiles. Now layer in the social elements to help marketeres "earn" impressions.

There is a fairly strong chance they will own an enormous % of market share of ALL online and mobile display advertising in the near future.

I think the telegraph, telephone, and internet where both similar to and far larger than Facebook.

User count is only one dimension of the value that Facebook has. The user connections are arguably the more important dimension.

As Facebook figures out more ways to be a more pervasive force in people's lives, they'll have the ability to multiply the revenue they receive on a per-user basis.

I think there's plenty of opportunity for exponential growth in Revenue. When we start measuring that in users, I think something is broken.

The problem is that Facebook's primary asset is users. They're making money off of them(approximately $1/user in profit and $3.5 in revenue), but it's not clear if they can make exponentially more per user.

They certainly can't expand the user pool by that much, which means that they need to find a way to monetize their existing users more effectively. I think that Facebook can certainly make more/user than they currently are. $5, maybe $10/user is possible. But $100? I don't think so.

Hard to imagine exponential growth in what either users or advertisers are willing to pay. An analogy to FB as a user service might be, say, MMORPGs like WoW. They seem to exhibit early exponential growth due to peer pressure. Yet they are never priced more than $10 - $15/mo. Often they start out as a subscription service and then move to free-to-play.

So then are advertisers willing to increase their FB advertising budgets exponentially? Does FB have something coming down the pike on a regular basis to make that happen?

Virtual goods. It is a proven revenue model for social networks.

http://venturebeat.com/2009/03/19/the-worlds-most-lucrative-...

The link is from 2009, the title is "The world's most lucrative social network? China's Tencent beats $1 billion revenue mark".

That doesn't sound to me like a "proven revenue model" to support a $104B company with exponential growth.

Soo... Facebook Gold? ;)

Netflix makes over $100/user/yr of revenue. Why couldn't Facebook?

Those who are already not on facebook are either too poor to make FB significantly richer or care enough about their privacy that that they have chosen not to use FB.

Oh, I'm sure he wants to grow the company and make it successful. And I'm sure that he will do, he's shown the ability to make it happen.

I don't, however, think it will ever live up to the price they floated at. I suspect that Facebook will be a successful company worth about a third of what they launched at.

There are two problems with facebook's P/E. The first is that it's questionable whether they can grow revenue enough to justify such a figure. They can't grow their userbase by a factor of 10 because there aren't enough humans on Earth. And they have a huge roadblock in terms of further monetizing individual users. Ultimately investing in facebook isn't a bet that they'll keep doing what they're doing now (as it is with amazon or apple), it's a bet that they are going to fundamentally change everything about how they advertise and somehow garner a huge increase in per user revenues.

Second, facebook stock is already priced at a level where it's expected they'll be taking in a huge percentage of total worldwide ad revenues. Where can it go up from there? There isn't much reasonable headroom there, which makes it a very poor stock to hold on to.

I don't get it, why would it be priced perfectly ? Why would you want it to decrease ?

Because stock value, after you've gone to the pay window / sold the initial amount to make your investment money back and make money for founders, doesn't really matter to the founders / investors. They know that it's not tied to any real internal metrics. Stocks are a game. Game for the economy when people who don't understand are better high-risk and don't have a clue about internet evolutions / the cycles online. Facebook took advantage of that. Smart? Sure. Abusive? Yup - though they haven't shown much care for what they do to users/consumers anyway.

This seems like a short-sighted outlook, as it ignores the fact that the stock price matters to employees who have been given shares as incentive, and it also matters for the company's ability to raise money via selling shares again in the future.

Hm. But for an employee with stock (they have a six month lock in selling) there is really no difference in 1) FB making IPO at $30 and rises to §33 second day or 2) FB rakes in $38 and falls to $33 on second day.

Most stock grants to employees are at a particular locked in strike price and they can't sell for 6 months or so anyway.

So their "buy" price as already set and their "sell" price was going to be set by the market anyway.

This is the only time FB can set the price. Any later sales of shares will be market priced.

Facebook only gets the IPO money. If the shares double on opening day, it's a sign they could've made a lot more money (or given away less equity for the same amount of money).

Zuckerberg et. al. did pretty well out of this.

No they didn't. They would have if they had dumped all their shares the first day, which they did not.

Zuck's net worth may have dropped 10% this morning (depending on how many shares he sold yesterday).

> No they didn't. They would have if they had dumped all their shares the first day, which they did not.

I'm talking about the money Facebook made off the IPO shares, not the net worth of Facebook employees.

> Zuck's net worth may have dropped 10% this morning (depending on how many shares he sold yesterday).

Changing the IPO price wouldn't have changed that. If they'd opened at $15 and popped up to $35, Zuckerberg's net worth would still be the same as it was when it opened at $38 and dropped to $35... but Facebook itself would've gotten much less money out of the IPO.

i agree the 51% that has been retained is there so that he can retain control, he doesnt actually care if it tanks , his made a huge wad and still has command, perfect!

Well, minority shareholders do have some rights. They can sue him for breach of responsibility if he runs things into the ground.

CRM has been trading well in excess of 100 P/E for almost 3 years- and they were negative last quarter- yet everyone that owns an S&P 500 index fund owns some of that. Maybe that's your point though, diversify...

Does Facebook make the S/P 500 cut?

But the employees who were promised shares at a $100 billion valuation (which probably happened since 2 years ago), won't get that kind of money. They will get whatever Facebook is worth a few months from now.

No one was promised a hundred billion dollar valuation. Everyone saw the prices on Sharespost.

er this IS Zukerberg, his screwed over pretty much everyone he's ever worked with, hardly surprising

Here's a guy who went into his competitor's site and started deleting user accounts. It's amazing that people overlook this:

http://www.businessinsider.com/exclusive-mark-zuckerbergs-se...

He also rented out theatres so that his employees could see The Social Network on opening night - a movie that puts him in a decidedly unfavorable light. Saying that he "screwed over pretty much everyone he's ever worked with" screams of someone who doesn't know what they're talking about.

Keep in mind they didn't sell all of the company, only a fraction of it. The biggest shareholders are basically the same as before the IPO... the idea is not to price that one day to perfection, it's to maximize the value over a period long enough to unwind the rest of your position in the secondary market. If you IPO a company and the IPO "busts", it reduces investor demand for shares when you actually try to sell the rest of them out into the market.

Wrong.

http://www.businessinsider.com/chart-of-the-day-why-facebook...

Not wrong. Facebook and the investors that sold stock in the IPO got $38*the number of shares. Whatever happens after the IPO is essentially irrelevant to them, except their remaining shares have gone down in market price. That probably doesn't hurt much if you realize that a day earlier there was no market price, and you got a great deal on the shares you did sell. Morgan Stanley is probably also not being harmed in this transaction (see http://en.wikipedia.org/wiki/Greenshoe ). They do have reason to support the IPO price level. Otherwise, it will be much harder for them to find investors for the next Internet IPO, which means lower prices, which means lower underwriter fees.

The people on the wrong end of the deal are those that bought Facebook shares pre-IPO or in the hours after the IPO. The people on the right end are all early Facebook investors selling shares and the underwriters.

You are basically admitting that Zuck didn't build a valuable company, but instead he conned investors (and Main Street) out of billions (coming days and weeks will tell exactly how much). So, congratulations to him I guess.

There's no con here. Anyone who bought at the open price had all the information they needed to make an educated purchase of the Facebook stock. I'm not an institutional investor and I looked at the P/E of 100 and thought it would be kind of silly to buy at that price and many others here seemed to think the same thing.

Zuck has built a valuable company - its just not $100B valuable. But a $25B company isn't peanuts.

Agreed, but it turns the stomach a bit to read the FB fanboys slapping each other on the back about FB being a "$100B company" (and that the IPO "proves" it).

FB scored a win by getting $100B, but in my opinion it's tainted, and they may have poisoned the well for those who follow.

Higher stock price makes it easier to use stock to buy other companies.

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