Mendoza School of Business

Is the tech-stock market deflating?

Published: May 24, 2012 / Author: Tim Loughran

Is there a lesson for tech investors in Facebook Inc.’s IPO? Perhaps we already learned what we needed to know months earlier during Groupon’s public offering. But, instead, the market keeps taking investors back to school.

On May 18, with great fanfare and even greater expectations, Facebook went public and sold shares to investors at a price of $38. On the first day of trading, the company managed to close mere cents above its offer price. Impressively for a firm in existence for only eight years, Facebook had a market capitalization of about $104 billion on trailing revenue of only $3.7 billion.

Only lofty investor expectations would explain paying $28 in market capitalization for every $1 of current sales — that’s sales, not earnings. The next two trading days were not good for Facebook investors, with the stock falling to below $31 per share.

Although the overall market was up on Facebook’s IPO date, Groupon Inc., Zynga Inc. and LinkedIn Corp. also suffered as investors simultaneously dumped shares of social media stocks.

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Topics: Mendoza