by Jack
FB has fallen again today. Currently it’s down 2.5% at $28.13. The initial offering was made on May 18th at $38 a share, however before the opening speculators had driven this up to $42, then the stock opened for real (on the NASDAQ) and it’s been sliding down ever since.
The IPO price was obviously too high and the market said so. This common stock was priced at 100 times earnings when most in this category are priced around 17 times earnings. The high IPO price was being justified because of the future earning potential. Future earning potential…that’s worth 100X earnings? That was the reason for the demise of the big dot com bubble! Good grief, have the FB people learned nothing from history? Apparently not, but it seems prudent investors have.
Note: If FB was priced at 20X earnings it would be $8.60. The 100X earnings valuation would have meant a growth in revenues beyond any stretch of the imagination in very weak economy when everyone else is just struggling to survive.
My guess is, even though FB is still remarkably overpriced the drop from $42 to $28 will cause amateurs to think they have real bargain priced stock. That sort of irrational speculation will likely cause FB stock to garner a very short term price spike…a spike built only on the “greater fool” theory. That is, you buy the stock betting that some greater fool will pay even more for it than you did. Not the best way to invest, better to [invest] in slots at Reno, at least the casino will buy you some free drinks.