Two Faces of Facebook

Some very smart and interesting writing about Facebook this week, most of which I didn’t read until after I launched my salvo last week.

So Morgan Stanley is under SEC investigation for possibly selectively releasing information about Facebook’s poor ad revenue on mobile devices. Oops!

And at least three separate groups of shareholders are suing Facebook and all its underwriters for hiding important investment information before going public.

See, individual investors and institutional investors had very different opinions about what Facebook is worth.

Whether or not that is due to Morgan Stanley’s selective release of information, I find that fascinating.

Facebook was two different companies running a single IPO.

In short, here’s what happened. After days (months? years?) of hype, Facebook filed amended IPO documents with reduced revenue forecasts buried down on page 57. The three banks underwriting the social network cut their forecasts for Facebook, without making it too public. … “Meanwhile, out in the real world, demand for Facebook stock was hitting a fever pitch,” writes Blodget. “One senior stockbroker at a major brokerage firm reported that he ‘had never seen such demand’ for an IPO.” These people didn’t know about the downgrades. And that’s how the price got set too high. People on the outside wanted it at $42, people in the know wanted it at $32. So we got a compromised $38.

Individual investors thought that FB is the next coming. Because it has a bagajillionzillion users, including everyone they know. And they check it every day. And they use it to share their baby pictures with their family. Facebook received an unusually large amount of purchase interest from Joe and Jane Sixpacks. (Which is why Morgan Stanley’s possible withholding of information from them is a problem). Honestly, I believe this would have happened even if they knew about Facebook’s iPhone and Android problems. Because the Facebook brand is so powerful.

But institutional investors retained a little bit of skepticism, thank goodness, questioning the long-term viability of the company’s business model. FB hasn’t adapted as well, so far, to the mini-revolution of mobile computing. Imagine where they’ll be in a few years, when recreational tech will change all over again, maybe a few times.

Two different companies, one confused IPO.

However, I’m not too sure what to make of this discrepancy.

  • Some kind of collective illusion about what “value” is in tech business? Or rather, widespread disagreement about the “value” of web 2.0? (Are we on 3.0 yet? I have lost track.)
  • A lack of popular financial education widespread enough to give or take billions of dollars to or from entrepreneurs?
  • Some essential truth about the nature of dot com businesses?
  • The dangers of treating (investing in) online trends as if they were the same as utilities or, you know, steel?

In any case, it’s well known that our economy is held up by a few fantasies—rock-solid-gold fantasies, but fantasies nonetheless.

The dollar is valued according to the world’s currency markets, relative to other major currencies, instead of by a lump of gold or even silver. Since 1973. Hello Nixon!

And our companies, the economic bedrock of our society, are valued according to what investors think they should be valued. When investors know what they’re doing, and research and model and project and maybe even talk to people, this can work out OK. It’s great. But when investors don’t do that, or they are spooked by some current event, or a big CEO getting sick, or whatever else can rock the markets?

Even the concrete calculations, based on income and assets and expert knowledge, and not much about my “belief” blabber, give FB a remarkably wide range of what it might actually be worth.

Our economy is based on a remarkable science.

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