The Facebook IPO is shaping up as one of the biggest opening flops in stock market history. By the end of its third day of trading, the stock was down by more than 18 percent from its initial offering price, and regulators were investigating amid accusations that the investment bankers did not fully disclose concerns about the company's earnings.
Whether or not there was any wrongdoing, the reasons for the Facebook flop are understandable. In many ways, this is an echo of the dot-com bubble of the late 1990s, when emotion triumphed over logic for long enough to drive Internet stocks to prices that could only fall.
This time around, though, there is an added element. The low interest rates that have made the last few years miserable for people in savings accounts and other deposits have also played a hand in stirring up stock market risk.
Here are four lessons from the Facebook IPO:
- The business model matters. Facebook has done a tremendous job in accumulating users around the world and holding their attention. However, they have only just begun to realize the revenue potential of their audience. This is consistent with the Internet-based approach: draw people in with a non-commercial offering, and then steadily introduce revenue-producing elements. The problem is, that transition isn't always seamless, as users sometimes balk at those commercial elements. As an investment with a still-evolving business model, Facebook was bound to be somewhat risky.
Getting back to the low-interest-rate issue, this environment heightens risk beyond just what it does to stock valuation models. Low interest rates have many people desperate for alternatives to savings accounts, money market accounts and CDs. The Facebook experience is a reminder that searching for extra return may well lead you into a whole new realm of risk.
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