Monday, May 21, 2012

Greedbook: Just a Wafer Thin Ton of Bricks

This is a depiction of Wall Street attempting to take down the massive facebook IPO.  Friday's debut was just the rumblings of indigestion:

As always, Wall Street's eyes are bigger than its stomach
Long-time readers of this blog (all three of them), know that I like to mix my metaphors, so you will forgive the title of this post.

However, the truth remains, that the last thing this market needed was $16 Billion of new stock issuance and a new company with total market cap of $106B.  Not only did the underwriters overprice it, but they increased the share issuance by 25% right before the debut.

Now the market has to find the true price level for this POS which is clearly below the IPO price of $38, and if standard pricing benchmarks of earnings or revenues are used, the true price should be substantially lower.  On a P/E multiple basis, Facebook trades at a 76 multiple v.s. 14 and 11 for Google and Apple respectively.  For those who say that FB is growing faster, guess again, in this latest quarter, advertising revenue actually dipped, and so now there are a lot of questions as to how this company will 'monetize' its user base.  

Blood in the Water
Regardless of the true valuation for this company - which is always a subjective topic, we can discern from Friday's trading, that it's not at 38, given that the underwriting syndicate had to come in and support the stock at various intervals, which is HIGHLY unusual for a tech IPO.  The normal goal of an IPO is for the underwriters to sell stock to their preferred customers at the IPO price, who then turn around and 'distribute' that stock into the open market at a large profit.  Day one trading is not supposed to be about a bunch of hedge funds tripping over each other to dump their shares at breakeven.  Even Groupon which is now considered a failed IPO (because it trades below its IPO price), closed its first day at $26 which is $6 above its IPO price of $20.  Zerohedge estimates that the underwriting syndicate spent an astounding $2 billion to support the stock on the first day !  So now, every hedge fund on Wall Street will be trying to figure out ways to get Morgan Stanley et al. (the underwriters) to puke up that stock.  This is similar to the situation over at JP Morgan where that initial loss estimate of $2 billion has already grown by 50% as the sharks moved in for the kill by shorting JPM's position.

Apparently no one on Wall Street ever lifts their head out of the feed bag long enough to realize how this cannabilistic greed lust contributes to overall systemic risk.  The last thing the stock market needed was a sloppy overpriced IPO on the last day of the week with the market down 4%.  Now, the last thing it needs is a school of sharks attacking yet another stricken investment bank.

Meanwhile, it would be highly ironic indeed if the market had held up just long enough for the most overhyped Tech IPO of the decade, only to collapse under the weight of its issuance.  After all, the other glorified Tech stocks of the day (Apple, Priceline etc.) all rolled over weeks ago.

Therefore, the only major growth stock that made a new high last week was Facebook, just in time to see its share pass from strong hands (with entry prices well below $38), to weak hands who paid an average of $40 and are already down 5% after just 6 hours of trading.  Worse yet, the Facebook IPO has a much shorter than usual insider lockup period (3 months v.s. 6 months), so after 3 months insiders will be dumping their shares onto the market, doubling the float.

We will now see how the market holds up with a new $100 billion rock tied around its neck.