May 18, 2012

∴ Facebook Does a Faceplant, Recovers

An interesting thing happened shortly after the somewhat delayed trading of Facebook stock began today. The share price crashed from the open, from nearly 10% over the initial offering price to break-even at $38. It has since recovered. It’s an interesting, if short story why.

The investment banks underwriting the offering priced Facebook’s shares at $38 after yesterday’s market close, setting the selling price to their prime customers. Those shares could be re-sold to the public today, perhaps netting sellers a nice profit. IPO shares usually trade up as small investors come into the market, buying at any price.

When the appointed hour arrived, though, there were no FB trades. First 11 AM passed, then 11:05, then 11:30. It wasn’t until shortly after 11:30 that the first trade crossed at $42.05.

The share price began to slide after a flurry of 82 million shares changed hands in the first thirty seconds. Before an hour was up, FB was trading for its initial price of $38.

It was at that point that, according to CNBC’s David Faber, the underwriting banks stepped in and bought shares of FB, propping up the price. The share price recovered to the low $40s, where it stands now, a little after 2 PM.

So what happened? The delayed trading was ascribed to NASDAQ’s inability to create an orderly flow of transactions. Hours later, some investors had not received confirmation of their trades on the opening price.

Investors hearing this news backed away from trading, causing an imbalance where there were more sellers than buyers. The price crashed. It wasn’t until the underwriters removed the imbalance by holding the line at $38 that FB recovered.

So what’re Facebook shares really worth? About $40 right now, within the 5% - 10% target range set by the underwriters. As it stands now, Facebook's IPO is a success, netting the company maximal income while providing early investors with a reasonable profit.

While some investors may still be cautious after its rocky opening, can anyone doubt that Facebook shares will be trading higher by this time next year? Even if what we call Facebook today amounts to a fad, the momentum the company is carrying as it unveils new features and services is enough to keep users and investors interested.

That said, no, I don’t own any shares of the company. You’ve got to be nuts to buy on opening day.