{"id":12,"date":"2012-10-07T13:25:43","date_gmt":"2012-10-07T20:25:43","guid":{"rendered":"https:\/\/blogs.ubc.ca\/rahulagarwal\/?p=12"},"modified":"2012-11-19T03:03:44","modified_gmt":"2012-11-19T10:03:44","slug":"analyzing-the-fall-of-facebook-stock","status":"publish","type":"post","link":"https:\/\/blogs.ubc.ca\/rahulagarwal\/2012\/10\/07\/analyzing-the-fall-of-facebook-stock\/","title":{"rendered":"Analyzing the fall of Facebook Stock"},"content":{"rendered":"

In May 2012 a first was made. For the first time, Facebook was offering its stock to the general public.<\/p>\n

Fast forward to October. Facebook stocks hover around $21. How did the most highly anticipated IPO of the decade lose<\/p>\n

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45% of its initial price? This phenomenal drop was caused by factors in the stock specifics.<\/p>\n

In the aftermath of the IPO, there were clear indications that the stock was about to fall.\u00a0 During the IPO, Facebook\u2019s total market cap was $81 billion. However, analyzing Facebook\u2019s financial statement shows that its book value was only $11.87 billion, which leads the Facebook P\/B ratio to be 6, which means the stock was overvalued. Secondly, the P\/E ratio was too high; even now the P\/E ratio is well over 100. \u00a0Furthermore, Facebook\u00a0doesn’t\u00a0have a history of paying dividends, so buying it was like a \u201cponzi scheme; the stock is only worth as much as the next person in line is willing to pay.\u201d<\/p>\n

Lastly, the fact that Facebook\u2019s stock price fell after its IPO isn\u2019t surprising once you see other IPOs and how they fared in the short term. IPOs typically occur when the company is traditionally doing very well, and the optimism about the company turns into unreasonably high expectations about the company\u2019s future, resulting in an inflated stock price. Therefore IPOs are rightly defined by Benjamin Graham to be \u201cImaginary Profits Only\u201d.<\/p>\n

To conclude, investors would be better off ignoring the Facebook stock, or, \u201cDefriending\u201d the Facebook stock altogether.<\/p>\n

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References:<\/span><\/strong><\/div>\n
Raice, Shayndi, Anupreeta Das, and John Letzing. “Facebook Prices IPO at Record Value.”Http:\/\/online.wsj.com<\/em>. Wall Street Journal, n.d. Web. 7 Oct. 2012. <http:\/\/online.wsj.com\/article\/SB10001424052702303448404577409923406193162.html>.<\/div>\n
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Kennon, Joshua. “If a Stock Doesn’t Pay Dividends, How Can It Be Worth Anything?”About.com<\/em>. About.com Investing for Beginners, n.d. Web. 07 Oct. 2012. <http:\/\/beginnersinvest.about.com\/od\/dividendsdrips1\/a\/why-stocks-without-dividends-can-still-be-a-good-investment.htm>.<\/div>\n
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Photo Credits:<\/span><\/strong><\/div>\n
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Facebook Stock<\/em>. 2012. Photograph. Cagle Cartoons.\u00a0Allvoices.com<\/em>. Allvoices, 17 Aug. 2012. Web. 7 Oct. 2012. <http:\/\/www.allvoices.com\/cartoons\/c\/94216241-facebook-stock>.<\/div>\n
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Related:<\/span><\/strong><\/div>\n
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\u201cIntelligent Investor\u201d by Benjamin Graham<\/div>\n
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In May 2012 a first was made. For the first time, Facebook was offering its stock to the general public. Fast forward to October. Facebook stocks hover around $21. How did the most highly anticipated IPO of the decade lose … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":14588,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-12","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/blogs.ubc.ca\/rahulagarwal\/wp-json\/wp\/v2\/posts\/12","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.ubc.ca\/rahulagarwal\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.ubc.ca\/rahulagarwal\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.ubc.ca\/rahulagarwal\/wp-json\/wp\/v2\/users\/14588"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.ubc.ca\/rahulagarwal\/wp-json\/wp\/v2\/comments?post=12"}],"version-history":[{"count":25,"href":"https:\/\/blogs.ubc.ca\/rahulagarwal\/wp-json\/wp\/v2\/posts\/12\/revisions"}],"predecessor-version":[{"id":120,"href":"https:\/\/blogs.ubc.ca\/rahulagarwal\/wp-json\/wp\/v2\/posts\/12\/revisions\/120"}],"wp:attachment":[{"href":"https:\/\/blogs.ubc.ca\/rahulagarwal\/wp-json\/wp\/v2\/media?parent=12"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.ubc.ca\/rahulagarwal\/wp-json\/wp\/v2\/categories?post=12"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.ubc.ca\/rahulagarwal\/wp-json\/wp\/v2\/tags?post=12"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}