Facebook’s IPO Scandal Comes Back To Haunt It

  • Alternative revenue stream will drive Facebook stock price appreciation in 2015.
  • Even though the company has come a long way since its IPO in 2012, the scandal refuses to calm down.
  • A federal judge in New York allowed shareholders to pursue class actions accusing Facebook of hiding material information during the IPO.
  • I see little impact on the Facebook stock from this class action for now.

The Internet giant Facebook (NASDAQ:FB), has come a long way since it was a pure social network, and it has worked relentlessly in recent years to develop new revenue streams to support the core advertising revenue stream. In an earlier article, I discussed how alternative revenue streams like the Oculus VR, P2P payment transactions, and business reviews serve as catalysts to Facebook stock price towards 2016. Even though these new businesses are adjacent to the core social network business and fully correlated with it, they can also exist as standalone businesses. This is a significant development for Facebook as a company to step outside of its comfort zone and generate long-term revenue streams while not letting go of its strengths in the social media.

These days, Facebook’s reach to new business seems obvious; however, only a few years ago when the company went public, many were concerned that Facebook was a one-hit wonder company and could mimic some of the dot-com companies of the late '90s and disappear quickly from our lives. Facebook’s debut on the public markets did not help the company to shake off the dot-com thoughts and overvaluation concerns. Facebook's IPO in 2012 experienced two out of the ordinary events: the first one was a very rare glitch on the NASDAQ computing systems that prevented traders from placing orders and forced the exchange to halt the beginning of trading for more than 30 minutes while NASDAQ tried to find some workaround solution to the matter.

The second event is that Facebook hiked its IPO share price from $28 in the initial pricing to $38 but experienced a modest hike in stock price on its first day of trading followed by a sharp decline in the months after. The impact of the first event was immediate. Orders made during the switch did not go through, and some orders that went through weren't confirmed until hours later. Facebook's IPO glitch cost NASDAQ not only its good name but also $10 million in an SEC fine and $40 million in investors’ reimbursement funds. Moreover, following the NASDAQ failure during the Facebook IPO, Twitter (NYSE:TWTR) and Alibaba (NYSE:BABA) chose to go public on the New York Stock Exchange and prevent this from happening on their market debuts. In retrospect, this event was entirely resolved.

Unlike the first event that was resolved relatively quickly, the second event was just recently discussed in court. Last week a federal judge lifted a confidentiality seal from a decision made earlier in December to allow Facebook shareholders to pursue two separate class actions accusing Facebook of hiding concerns about its growth forecasts before the company's May 2012 IPO. Shareholders accusing Facebook of hiding information about the company’s mobile ad growth that later impacted the stock price and allegedly drove them to lose money on their investment during the IPO. However, let’s put that claim into perspective looking at the Facebook stock performance since IPO in the chart below.

FB_chart 6_010416

As shown in the chart, even though Facebook stock had a rough year in its first year as a public company, an investment in Facebook since IPO yielded a whopping 173% return. However, investors looking to gain a quick profit from the IPO faced tough losses in case they sold their holdings in the first year. Investors that did not sell their holdings during that time frame gained significant return – which proves two excellent points about investing: the first point is that the patient is indeed a virtue – those who looked at the big picture and waited were rewarded at the end. The second is not to be too action-oriented or short-sighted when taking a bullish position. Unless you engage in an event-driven investment with a clear beginning and an end, an investor should look to merit from the big-picture move over the long term and avoid short-sighting investments.

By now, there has been no mind-boggling evidence released to the media that Facebook intentionally tried to commit fraud and hide information. For now, I don’t see this legal action as impacting Facebook stock significantly or offsetting the catalysts mentioned above. I believe there is a very small chance that Facebook could be affected by this class action or be required to pay a fine. If one of these was to happen, it might trigger negative PR that could slightly impact the stock price.

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