Our (admittedly delayed) reaction to Facebook”s IPO.
If you haven”t heard anything about the Facebook IPO, then yes, you have lived under some sort of rock for the last few months. Facebook listed with a market value of $38 per share, and although traded well on the first day, last over 17% of value in the first week. It was trading at a PE ratio of over 100.
Which means that some investors (although I”m not sure one wants to call them that) believed that Facebook”s business was worth more than 100 times what it earned each year. Sound ridiculous? Well, yeah, it is/was/still will be for generations to come.
The drop in share price of Facebook also affected other technology stocks that rely on similar platforms to Facebook, so the prices of companies like Groupon, LinkedIn and Zynga were badly affected. For some reason or other however, Yahoo! pulled nicely up as Facebook began to burn.
Now why does this matter to you? Well, besides from the fact that you actually use Facebook more than any other company”s offering, and that this is EXCELLENT dinner-conversation to have with your girlfriend”s father, it teaches us a big lesson:
Never ever buy on sentiment, or because people say it”s a good idea. Always research a company thoroughly before you invest in stocks.
What”ll be interesting to track is whether the markets believe all tech-stocks are overpriced at the moment and there is yet another “bubble burst” in the next few months. My money is on companies that create hardware (Apple, Microsoft, Amazon) and not on companies who rely on advertising for revenue (Groupon, Facebook, Twitter).