Buy on the Hype or on the Hype of the Hype?
May 19th, 2012Let’s say you just launched your company with an IPO that valued you as one of the 25 most valuable companies in the nation. Would you be disappointed that your stock closed barely above its initial price? And if so, how many of your tears could you dry with the over $19 billion you are now worth (on paper, at least)? These are the questions facing Facebook now after its Friday IPO. On the surface, the IPO was a rousing success. But considering stocks are supposed to increase in value, Facebook sputtered out the door and perhaps priced its shares incorrectly. So what were investors thinking?
First, a lot of people were buying and selling. 580 million shares of Facebook changed hands (meaning, the same share was moved multiple times). Compare that to Apple, which moved 26 million on the same day. In other words, a lot of people were getting in just to see what would happen. This accounts for Facebook’s initial rise in price, followed by a decline that settled the price just above its initial amount. People were buying on the hype of the hype, because if they were buying on the hype alone (in other words, believing that the stock would soar in the coming weeks and months), then they would have held onto those shares.
Second, there was nothing but bad news about Facebook prior to the IPO. In one notable case, GM announced they were ending $10 million in ad business with the company and instead focusing their efforts on the free services that Facebook provides. Further, while privacy changes will soon lead Facebook to announce a Facebook third-party ad platform, this news didn’t get any mainstream coverage. It’s the one thing that could have beaten back fears that Facebook was losing revenue but Facebook was restricted from taking about the plans themselves and for this reason, there likely wasn’t enough evidence to go on for any mainstream media outlets.
Third, comparable stocks took a beating too, suggesting skepticism in investors about the tech sector. LinkedIn was down over 5%. Zynga was down over 13%. It wasn’t good news for Facebook competitors, either. Google was down over 3%. Yahoo was up, but that’s not a good metric given the roller coaster that Yahoo has been on recently. It’s clear that Facebook’s performance was not great but far from terrible. If there is skepticism from investors, then Facebook still managed to rise above it and perform better than comparable companies.
The real problem at the heart of Facebook stock is that investors don’t have much data to go on. They’ve seen Facebook go on an incredible rise in popularity and power. They see a company with 900 million users (and adding more users every day). It’s also one of the rare times that an investor can make a substantial buy in a company that impacts her daily life. This connection suggests Facebook will receive more attention than other companies. But if investors keep buying on the hype of the hype, how long can it possibly continue? Facebook is about to drop from the news, at least drop from favorable coverage. Get ready for even more scrutiny of the company, their policies, and earnings. With no hyped hype, who will still want to buy? Get ready for a full week of trading resulting in no significant rise in Facebook’s price.


