Facebook’s IPO drama didn’t cause broad market woes
The Facebook stock debacle is not responsible for global warming, and is not a sign of the Apocalypse. It isn’t the “stock story that changes everything,” the “trigger to the final fall of the American Empire,” or any of the rest of the hyperbole that has been applied to it by the foaming-at-the-mouth bloggers and journalists fawning over the story.
It was an overpriced stock, where the initial valuation was based more on hype and goodwill than a real assessment of its value.
But dig into the theories and conjecture about the deeper meaning of Facebook’s embarrassing performance after the initial public offering, and you can at least gain some insight into the market and investor behavior. Some of this search for meaning may lead to valuable conclusions – Facebook’s IPO disaster could signal the end of a market cycle that favors growth stocks – but those can be hard to find amid the poppycock.
Here are some of the big-picture things that have been said in light of the Facebook headlines:
Facebook’s failure means it is time for value stocks to become market leaders.
There’s not necessarily cause-and-effect with Facebook here, but the market does appear to be coming to a point where value stocks will come to the fore. After all, if the economy scares you, the way to invest is to buy solid businesses at a discount, rather than picking up companies that need a healthy economy to continue their momentum.
Facebook most likely will never be a value stock, even if it gets down to the high teens and becomes relatively cheap. But it also didn’t change the landscape for growth investing.
More likely, it’s just time for a shift towards value, with growth having dominated for longer than most cycles typically last. Ted Baszler of Heartland Select Value said on my radio show that people may view Facebook as the point at which things turned, “but this was turning – and is going to turn – no matter what happened with Facebook.”
Facebook will be the last overhyped initial public offering; the IPO market is changed forever.
Until the next one. It’s not like Facebook’s potential issues weren’t right out there for the world to see from the moment it registered to go public. There was the decline in first-quarter net income, General Motors pulling ads, and the level people were forecasting on the stock would have it trading at 30 times revenue and 100 times sales. That might work for a small company for awhile, but Facebook was coming out with a $100 billion market capitalization, which didn’t give it anywhere to go. So long as people dream of fast profits – which for most people is until the day they die – there will always be a crowd that falls for the next chance to “get in on the ground floor” of the next perceived great stock.
The only thing that Facebook may change is that future hype might be better tempered with the realism of valuations.
Facebook’s problems signal the start of a new era of corporate and investment-banking responsibility.
No. Consider what happened here the Wall Street equivalent of a speeding ticket. Everyone slows down when they see the cop issuing a ticket by the side of the road, but a lot of people speed up once the traffic stop is out of sight and off the radar, figuring they won’t get caught for going fast.
Wall Street is all about getting there fast, and that’s not changing because the public had a bad reaction to one IPO, even one of the biggest ones to come along in years.
In fact, if and when Facebook’s decline is over and the company can find a way to claw back to where the stock traded at its peak on opening day, this will be called a triumph of open markets.
Facebook’s poor opening is a sign that the stock market is broken.
Actually, quite the opposite. Disagreement makes a market, and there are two sides to every trade, which means that there’s a good chance that half of the people involved in every transaction come away unhappy.
Truthfully, most IPOs are constructed to create an artificial pop; the fact that Facebook’s honeymoon ended so quickly is a sign that the smart money understood what was happening here. It profited on the suckers who were convinced this thing would shoot skyward, and then let the stock settle to a level closer to its fundamental value.
What was broken here was the logic of the investors who were so sure Facebook would not only shoot skyward but be able to hold a lofty price once it got there.
After Facebook, investors in new stocks will always focus on valuation.
Nope. Getting rich slowly will never feels as good as getting rich quickly.
If the market is indeed shifting to a period where valuations matter more, there may be fewer IPOs that have the big launch, but there will always be growth and momentum investors, as well as hopers and believers who simply want to buy what they know and expect everyone else to eventually push the market to where they can register a profit.
Facebook has soured a generation of investors to the stock market.
Well, it could be that the market basically went nowhere during the decade of the 2000s, or that investors still feel burned by the fallout from the bursting of the Internet bubble. It might be the huge profits made by financial firms compared to the paltry profits or nagging losses experienced by most of their customers. It could be 401(k) retirement plans that have suffered to where they feel like 201(k) plans, or college-savings programs that left the new generation of investors with massive college debts still to pay off.
Or it could be Facebook.
The Facebook story has gotten so much play that it certainly could be a symptom in almost anything shaping investor mindsets for years to come, but it’s the side effect of a much bigger market condition, not the cause. In time, as the company stops being an almost-daily story, investors will remember that again.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at firstname.lastname@example.org or at P.O. Box 70, Cohasset, MA 02025-0070.