The biggest initial public offering in years may end up driving some small investors out of the stock market.
Facebook’s much-hyped IPO, which raised $16 billion just over a week ago, is plagued by allegations that select institutional investors had access to information about the social network’s financial health that wasn’t available to the public.
“The small investor is now feeling that the market is not of sufficient ethics to touch it,” said Denver shareholder advocate Gerald Armstrong. “(The information that was) spreading to certain select investors groups, rest assured it didn’t reach the grandma who was buying the 10 shares at Charles Schwab.”
Nine days before Facebook debuted on the Nasdaq, the company buried in a regulatory filing that its daily user base was growing faster than the increase in the number of ads it delivered. More users are accessing Facebook accounts on mobile devices rather than desktop computers, and the company acknowledged that it doesn’t “directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven.”
Facebook officials reportedly tipped off analysts at the brokerages that handled its IPO about the information. Those analysts cut their financial forecasts for Facebook but only shared the revisions with certain groups of investors, according to a Reuters report.
Shareholder lawsuits based on those allegations have been filed against Facebook and the brokerages.
Brian Barish, a Denver money manager, said the analyst adjustments appear to be fairly small, “but it’s an expensive stock, so little moves can get magnified.”
Barish said he stayed away from the stock because the company’s initial valuation of roughly $100 billion seemed pretty demanding “under any plausible set of projections.”
Facebook stock, initially priced at $38 a share, reached $45 on May 18 and closed Friday at $31.91.
Littleton investor Ross Unruh, who bought Facebook shares on opening day at $39.03 and repurchased more at $34.76, said the IPO controversy won’t push him from the stock market.
“I purchased my shares for the future growth of the company, not so much for current revenue,” Unruh said. “I feel Facebook is the best- suited company for future mobile ads, and with 900 million users, that could equal a lot of money.”
If anything, the Facebook fallout could provide a welcome warning to retail investors that IPOs aren’t sure bets, some experts said.
“While it may have been perceived before the tech bubble crash that you couldn’t lose on IPOs, over the (following) two months anyway, that is no longer the case,” said Michael Stutzer, a finance professor at the University of Colorado at Boulder.
He said individual investors should “pretty much stick with index type investments, and not try to play the IPO market.”
“It’s probably good that some of these things go down … because then people start to realize that there isn’t some free lunch here,” Stutzer said.
Andy Vuong : 303-954-1209 or
