Facebook (FB) Stock Price Chaos: 4 Biggest Risks of Investing


The fallout from the Facebook IPO may not be as big of a crisis as many were predicting. The stock increased for the second day in a row on Thursday to $33.03, up $1.03. It appears that more and more investors are getting comfortable at the current level with a few conditions:

Condition 1: Will mobile usage by FB users have a serious impact on the company’s revenues? FB has stipulated that this is an issue in its S-1 (SEC document), but what is the magnitude of the problem? How many of FB’s current users log on using a mobile? And most important, has this been baked into the FB forecasts that underwriters used to value the company?

Condition 2: Is FB’s advertising less productive for advertisers than other outlets such as Google? If so, and the loss of GM business indicates this is a problem, how will this affect the company’s short-term and long-term growth? Can the company diversify into alternative sources of revenue?

Condition 3: Have investors been seriously hurt in the distribution process? It may seem outrageous, but institutional investors almost always commit to more stock than they really want, or can afford, in “hot” IPOs (those that are expected to increase in price after the opening). The reason is that allocations by underwriters are almost always for less stock than what investors commit to. During the FB distribution process, investors received substantially more than they expected. This has resulted in significant losses as the stock dropped in price. Additionally, some firms may not have the capital to support such large allocations.

Condition 4: What impact will litigation relating to the IPO have on FB, its underwriters, Nasdaq, and the overall market? This is a serious open question. CNBC commentators reported that Morgan Stanley, the lead underwriter was having an internal conference call today with its brokers to discuss retail client complaints about the trading of FB stock.

No doubt, the FB IPO will have a huge residual impact. For one thing, regulators and Congress will likely investigate the IPO process. That’s all we need is another hearing in Washington and some new regulations. The securities industry will likely manage tech IPOs more carefully in the future based upon the last minute financial issues that arose during the FB IPO. And, Nasdaq will not necessarily be the stock exchange that companies and underwriters go to for new offerings based upon its dismal performance with FB stock.

In the future, fundamentals will move FB stock up or down. Earnings growth is the key to success, not how well its IPO was completed. Attracting new users (not a problem for FB), the impact of the mobile business, and increasing and diversifying advertising revenues are the important things to follow. Seems to me, FB should attempt to allay market concerns by addressing these items publicly.