I’m not usually one to defend Facebook. Yes, I “use” it—it has more of my high school classmates as members than Classmates does—but it’s getting increasingly difficult to block Games from feeds, the adverts are cluttered, and the view doesn’t seem to optimise based on the screen I use. In short, it’s not trying too hard to keep me as an on-site consumer, and I’m not having a crisis reading it with TweetDeck. But the suggestion that the IPO is in some way an indicator of the Coming Apocalypse of the Internet or somesuch is absurd. So when Brad DeLong caught Ross Douthat being an idiot about the FB IPO (in other news, the Sun appeared to rise in the East today), I felt the need to defend the stock market in comments:
If you price an IPO properly for everyone, and everyone is working with clean hands and composure, there should be no “pop” at all. Since that will never happen, a pop of 5-10% on the first day is good, and anything 20% or under is a fine accomplishment. In the pre-InternetIPO days (Boston Chicken forward, if you want to quibble—though the really Stupid Investing 101 cases such as VA Linux or mp3.com are all tech-related), you rarely heard of companies doubling or trebling their IPO levels on the first day. Even during that time, most of the IPOs—Visteon, anyone?—didn’t “pop.”
If the Internet is understood as a mature industry, we shouldn’t expect to see “pops” as a rule. Too many people know too much. Just for fun, I googled “IPOs in the 2010s.” The third hit produced a link to a 247wallst.com article on “The Top 7 IPOs in 2010,” or at least the Q4 review of same. So I took those seven Ticker Symbols and put them into Yahoo! Finance (which is still easier to use than the Google version).
There are a couple of things to note here. First is that we’re working with the winners of the winners here; the firms that, with less than two months to go in the year, were the “winners.” With that in mind, look at the first-day changes (third to the last column). Five of the seven were priced within 10% of their first-day close. Only two “popped,” and one of those (QLIK) closed below its Opening Price on the exchange. The other (MMYT) was up slightly more than 20% from its Opening Price. Conclusion: The best of the best get priced rather fairly; a “pop” on the IPO is the exception, not the rule. Second is that the Exchange doesn’t necessarily help. The worst performer (JKS) was issued on NYSE. The best—and also the second worse, not to mention two of the three losers—are on NASDAQ. And third is that, even of the Successful IPOs in any given year, more than half of them (four of the seven) have returns that are lower than that of the inflation rate. As I said chez DeLong, referring to a couple of 2010 IPOs that were on no one’s Winner’s List:
If you take just Investopedia’s two “loser IPOs” from 2010, NKBP (Chinese) is down just under 50%—[which is due to a] major recovery recently—from its IPO price, while DVOX (market similar to FB’s) is down around 90%, trading as a “penny stock.”
Short version: Whether or not Facebook will be a winner as a company in the long-term has very little to do with the performance of its IPO. People who confuse the latter for the former—such as Ross Douthat—should not be paid to write about investing. (cross-posted from Skippy the Bush Kangaroo)