A wonderful thing about the Facebook IPO is that there is a proliferation of imaginary markets in which to … well, not trade it exactly, but say what you would be doing if you could trade it, which is almost as good. Here is the Wall Street Journal’s imaginary market, with a “Current Price Prediction” of $52.43, off a touch from the $150.13 as of … yesterday. Admire their specificity! Elsewhere you get only binaries, or I guess ternaries, like CNBC’s “Do You Think Buying Facebook Shares Would Be a Good Investment?” [yes / no / don't know], or Felix Salmon’s “Are you seriously thinking of buying Facebook shares?” [yes / no / umm, I'm buying them for a friend].
In the imaginary market that counts (I guess?), Facebook is up “an average of 14 percent” (!) as the underwriters raised the IPO range from $28-$35 to $34-$38 in a refiled S-1 this morning. This is good news if you bought in the imaginary market at $28-$35, as I suppose the underwriters imaginarily did, and also good news if you avoided the real market when it last cleared north of $44, as this guy who’s pissing away his child’s college money on Facebook did. If you like numbers, you could look at these numbers*:
One reason that the imaginary markets have captured the fancy of young and old is that it’s easy to have an opinion on Facebook. I am on Facebook, you think. I can analyze its business prospects. Can you? For example, here’s an easy one: would you buy a Chevy Volt because you saw it on Facebook? I would not, and I am not alone:
General Motors Co. plans to stop advertising on Facebook after the company’s marketing executives determined their paid ads had little impact on consumers, people familiar with the matter said, a move that comes as more companies question the effectiveness of advertising on the social networking site.
The article is amusing throughout; for some reason I especially enjoyed the fact that Facebook is going from 25% to 0% of GM’s Facebook budget:
Asked about the move, GM marketing chief Joel Ewanick said the auto maker, “is definitely reassessing our advertising on Facebook, although the content is effective and important.” Content refers to the unpaid Facebook pages many companies use to promote their products. …
GM spends about $40 million on its Facebook presence. About $10 million of that is paid to Facebook for advertising, the rest covers content created for the site, agencies that manage the content and daily maintenance of GM’s pages, people familiar with the figures said.
Left unanswered is why GM sources are telling this to the Journal now, instead of waiting a week and being able to insider trade on it.**
I’ve been sort of dismissive in the past about how hard it would be to successfully execute an IPO like this – I mean, 11- and 79-year-olds who’ve never bought stocks are clamoring to buy, and the book is supposedly 25x covered in Asia alone, which is kind of an amazing stat. Also, I cannot reiterate this enough, there is a movie about it. The $150mm or so that the banks stand to earn here is probably out of proportion to the difficulty of their task. And I and others have questioned whether going out with a relatively conservative initial price range was more for the banks’ benefit than for Facebook’s.
That said, though, there’s something to be said for the execution so far. This book is 25x covered. What does that suggest to you about the market-clearing price for Facebook shares?*** It suggests to me something like … well, let me draw you a picture:
That is, this deal is priced to generate frenzy despite problems ranging from dress code violations, through somewhat amazingly getting an HSR second request on Facebook’s $1bn purchase of a company that doesn’t sell anything to anyone, to Facebook’s only source of revenue being ineffective. The interaction of the current price range and the strong demand makes a pricing at the top of the range, and pop the next day, pretty bulletproof. Let’s say that GM’s announcement scares half of Facebook’s investors away altogether. That still leaves it 12x covered in Asia alone. 12x covered, especially on a company where no valuation metrics make particular sense (so why have limits?), suggests a top-of-range pricing and a whole lot of people buying in the market the next day.
For a company that lives on buzz, that relies on coolness and ubiquity not only for its capital markets strategy but also for its business strategy, that can’t be a bad thing. Much like … umm … Facebook, the IPO provides a limitless distraction. Bad news about the business? That’s okay, you can always make the story about the IPO price bump and attendant frenzy. And if everyone wants to blow their money on Facebook, there must be an advertising model in there somewhere.
* Note that I’m assuming that the greenshoe will be exercised; if there were an imaginary market for betting on that I would say yes.
** Right? The timing is weird. Maybe they’re hoping to get allocated in the IPO so want to soften demand?
*** I believe the correct answer is “it is greater than $34, but otherwise nothing!” Buyers at margins, etc. But don’t kid yourself, 25x covered probably gives you a wide range of limits, so the semi-correct answer is … that the greenshoe will be exercised, let us say, at a minimum. No position / not advice / do your own research / go away!