The pricing of Facebook’s shares last night and the beginning of trading this morning is an important moment in US business history.
No, not because it is the predominant social media platform, connecting people around the globe; no, not because it is another example of how Goldman Sachs usurped the intent of the 500-maximum S.E.C. investor rule at the expense of the little guy and gal; no, not because people are likely to overpay and lose some money.
It is a seminal event because after 12 years of not buying individuals stocks, the American public is finally ready to take some risk.
This says a few things: Americans believe Facebook is a promising business and believe they have enough saving to start participating in equities again.
Since the collapse of the tech and telecom bubble, Americans have stayed on the sidelines of the stock market. During the late 1990s, a typical month would see mutual fund inflows of $25bn. For the past decade, inflows have been hardly measurable. The buying of individual stocks has been almost non-existent. If there is a way to takeout the effect of day traders, I think it would be alarming the lack of participation in our market.
But the Facebook IPO may change this. People are calling up their FDIC insured banks and asking for the transfer of money to brokerage firm accounts. People are trying to buy shares online. People want to participate in the creative-destructive forces of capitalism.
Media pundits and tech experts say the masses will be overpaying. My guess is is that the pundits wouldn’t be pontificating if they purchased shares of Microsoft, Oracle, Cisco, and Google when they came public. At these times, the voices are always loud, all saying how overpriced these IPOs will be. Yesterday, a pundit said Microsoft was valued at 760m when it was priced. Today, the software giant makes about four times that figure in free cash flow every three months.
Even Yahoo (if memory serves me correctly) was valued at about $500m on its IPO debut and shot up to $1bn. There was great fanfare of how overpriced and overhyped these shares were. Even mishap after mishap, and four CEOs in the past year, the company has a valuation of about $18.6bn.
Facebook is a good, under-levered company with a competitive leader who wants to succeed. CEO Mark Zuckerberg gives every indication he wants to be in the same league as Gates, Ellison and Jobs, and not those who ran Atari, Commodore and Wang.
There is going to be wild swings in Facebook’s valuation. Leading technology companies can see 30% to 50% swings at points in time. So investors may lose money at the start, but if they stick with leading technology companies, the businesses can be bigger than one’s most wild imagination. Be a capitalist, just buy the stock. (By the way, buy at your own risk, I’m no stock jockey.)
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