We will only know what the market thinks Facebook is really worth when the IPO dust has settled, which will take several weeks or months. But Monday's 11% fall in morning trading is an encouraging development. It suggests that reality is dawning already that Facebook was grossly overpriced at 25-times last year's revenues – yes, revenues, not profits. That valuation was asking for trouble, and it's good that it has arrived sooner rather than later.
Facebook and its promoters were too greedy. Almost every detail of this IPO demanded a conservative approach to valuation. Insiders were selling heavily; the business is immature; founder Mark Zuckerberg is keeping voting control even though his economic stake was "only" 28%; the general stock market backdrop is weak; and the almighty sum of $16bn had to be raised. Yet the pricing of the shares was lifted in the closing week to satisfy demand that turned out to be wafer-thin.
Would-be buyers of shares at an IPO should always ask themselves a simple question: out of the universe of stocks I can invest in, is this the cheapest? In the case of US technology stocks, buyers at IPO seem preoccupied by second-guessing others' intentions in the hope of making a quick killing. The Facebook flop should serve as a useful reminder that there are no guaranteed winners and that the Wall Street-led hype machine can push its luck too far.
