No early-bird spe­cial for Face­book friends

The Washington Times Daily - - Front Page - BY TIM DE­VANEY

buy­ing with their hearts in­stead of their heads when Face­book be­comes a pub­licly traded com­pany, as ex­pected this spring.

“Your emo­tions are your big­gest en­emy as an in­vestor,” said Paul Mcwil­liams, ed­i­tor of the New Jersey­based Next In­ning Tech­nol­ogy Re­search. “They just get car­ried away some­times.”

In Face­book, po­ten­tial in­vestors are faced with an even more hyped name-brand prop­erty than such other re­cent so­cial- me­dia stocks as Linkedin and Groupon, the prices for which went through the roof and far be­yond the com­pa­nies’ long-term worth.

Linkedin set its ini­tial public of­fer­ing (IPO) price at $45 a share, but the ex­cite­ment sur­round­ing it meant that the stock be­gan public trad­ing on May 19, 2011, at $83 and rushed up to $122 dur­ing the first day of trad­ing. Shortly there­after, Linkedin shares plunged to about $65 each and is now trad­ing at $86.

Sim­i­larly, Groupon opened at $28 on Nov. 4, 2011, and jumped to $31 on the first day of trad­ing, but is cur­rently down to $19.

The Face­book frenzy could have an even greater ef­fect, pos­si­bly shoot­ing the price to more than twice what an­a­lysts say it is worth. While they ex­pect it to open in the mid-$40s or $50 per share, it could soon jump to more than $100.

“There’s a crazy amount of de­mand cen­tered around this IPO,” said Kel­ley Dami­ani, vice pres­i­dent of Trip­pon Fi­nan­cial Pub­lish­ing in Hous­ton. “Peo­ple are jump­ing into it no mat­ter what the price is. They’re get­ting in at these high prices.” But that price won’t last long. Af­ter the ini­tial in­flux in the stock price, an­a­lysts ex­pect it to set­tle closer to the orig­i­nal value of the IPO. Ms. Dami­ani ex­pects a slight 10 per­cent to 15 per­cent in­crease from the orig­i­nal price that could put the stock in the mid-$60s for the fol­low­ing few months.

All of that means that most early in­vestors will over­pay for their Face­book shares.

“It’s re­ally ar­ti­fi­cial de­mand,” Ms. Dami­ani said. “These in­vestors, they know Face­book, it’s be­come a house­hold name. Ev­ery­one wants shares of Face­book.”

The de­cline in Face­book’s stock price af­ter the first-day buzz likely will con­tinue be­cause of ef­fects of the “lockup pe­riod,” sug­gests a study from stu­dents at Washington Univer­sity in St. Louis.

For 90 days af­ter the stock starts trad­ing, Face­book man­age­ment can­not sell per­sonal stock, a rule cre­ated so that in­vestors can have con­fi­dence that the man­agers have Face­book’s best in­ter­est in mind.

The smaller num­ber of shares avail­able helps keep the ini­tial price high. But when this lockup pe­riod ex­pires, man­age­ment of­ten sells a large por­tion of stock, which in­creases sup­ply and forces the price down­ward.

“My cut of the pie goes down,” Mr. Mcwil­liams said.

The Washington Univer­sity study, “A Per­sis­tent Anom­aly,” found that tech stocks had what the schol­ars called a high “beta” score, mean­ing that they are per­ceived to be riskier and thus tend to lose the most value af­ter the lockup pe­riod ex­pires.

“Face­book prob­a­bly will be a high beta stock,” said Jonathan Woo, a grad­u­ate stu­dent who worked on the study, along with Sam Poteat and Borge Klungerbo. “Tech stocks gen­er­ally have higher be­tas.”

The neg­a­tive ef­fects of the lockup are usu­ally felt in the three to five days af­ter the ex­pi­ra­tion, Ms. Dami­ani said. She sug­gests that the true value of the stock will be­gin to show it­self about 60 days later, by which time in­vestors have a chance to see the com­pany’s earn­ings re­port and make a ra­tio­nal decision on whether to in­vest.

At this point, Ms. Dami­ani said, Face­book stock could drop near its orig­i­nal trad­ing price in the $50s. Mr. Mcwil­liams said it could drop even fur­ther to the $40s.

But Face­book poses an­other prob­lem in­vestors must con­sider — that the so­cial net­work could be­come out­dated if ei­ther Face­book users flock to an­other site or so­cial net­work­ing be­comes gen­er­ally un­pop­u­lar.

“We are afraid that it is com­ing to a phase where it could be an­other MyS­pace,” Ms. Dami­ani said. “It has a lot of con­tenders in the shad­ows.”

Not all tech stocks have folded. While so­cial me­dia stocks strug­gle be­cause of the ever-chang­ing na­ture of the in­dus­try, com­pa­nies in other tech sec­tors are hav­ing much suc­cess.

Ap­ple, known for pop­u­lar de­vices like the iphone and ipad, is dis­tin­guish­ing it­self as the wealth­i­est com­pany in the world. This week, it topped $500 bil­lion in value, be­com­ing one of only five com­pa­nies in his­tory to do that. It is trad­ing at about $545 a share, up from about $10 a decade ago.

Google, which went public in 2004, opened at $85 a share, but is now trad­ing about $620. The In­ter­net gi­ant is worth more than $200 bil­lion.

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