Without the banks, Facebook will crash

Without the banks, Facebook will crash

Here's the bad news for Facebook investors. After Friday's float, Facebook shares are likely to crash.

The Wall Street Journal reports that all those investment bankers protected the Facebook shares on the day of the stock market debut and kept them from dipping below $38. To put it simply, most investors weren't willing to spend $38 per share, not with the stock market cratering because of Europe. No one was prepared to take that sort of risk.There were 33 underwriters determined to make sure the offering didn't break below the $38 price so when people stopped buying, they bought up the shares to keep them at $38.

The big question is what happens when Facebook's security detail, the protection team of bankers decides to move on next week. No one will be holding up the shares then.

For Facebook to actually be worth $125-$150 billion or more today, it would have to be worth $300-$400 billion in a few years' time, otherwise it's not worth buying. Facebook would have to earn $20 billion of profit to justify a $300-$400 billion valuation, 20 times the amount Facebook earned last year. Which means it's going to have to find new revenue models. And we haven't seen any evidence of that.

Espen Robak, the president of Pluris Valuation Advisors, has told The Atlantic it doesn't make any sense. "Nobody knows what Facebook's revenue and profit model is going to be. If their revenue and profit model stays the same, this valuation doesn't make any sense. There's no way they can just squeeze enough plain old ad revenue to justify these numbers. They must change. We don't know what this is going to look."

In the meantime, investors are likely to be taking a "wait and see" attitude. That's why the shares will dip after the banks move on next week. Monday's story will be very different. Bad luck if you bought shares in Facebook.

Photo source DonkeyHotey


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