An embarrassing turn of events continues to unfold after the recent initial public offering (IPO) of Facebook Inc. (NASDAQ/FB). Talk about a roller coaster of market sentiment changes. Prior to the IPO, it seemed as if everyone wanted a piece of one of the hottest technology stocks in recent memory. Yes, Facebook’s user growth has been tremendous over the past few years, but questions are arising about everything related to the company, including questions from its underwriter Morgan Stanley (NYSE/MS).
When technology stocks go public, the underwriter will try to sell one basic idea to investors: the stock’s future growth is huge. Market sentiment was built up to a frenzy; yet it appears that the environment for technology stocks in this social media space is changing at a rapid pace, faster than Morgan Stanley expected. Morgan Stanley lowered its price forecast for Facebook, just a few months after its IPO. This is quite a surprise, not just for technology stocks, but for any company. The lead underwriter should know everything there is to know about the company. For changes to occur so soon after an IPO, it certainly causes some eyebrows to be raised.
Market sentiment has, of course, drastically shifted from overly bullish to quite negative, with shares near the year’s lows. With a high of $45.00 and a low of $17.55, this extreme shift in market sentiment cannot give investors much assurance as to the type of investors involved in this stock. Yes, many investors in technology stocks are shorter term and, thus, cause increased levels of volatility. But if the underlying strength of the company is that strong, we should see large institutions picking up what should be supposedly “bargain” prices. It appears market sentiment is now more aligned with the real business of Facebook. The market is raising questions about the value of its future. Even the firm’s underwriter, Morgan Stanley, is now raising doubts over the company’s ability to monetize the mobile segment.
The funny thing about market sentiment is the question of who or what is driving the marketing angle. Obviously, Morgan Stanley has to support the firm; it is selling Facebook to investors. But not only to outside investors, as the latest Morningstar report shows that many funds within the Morgan Stanley asset management division are heavy investors in Facebook. With shares down over 50% from the peak and with Morgan now lowering its price target just a few months after the IPO, it raises questions for many independent investors looking at technology stocks. If the underwriter has difficulty understanding the business, what about the small investor?
I think this is a good lesson for investors in technology stocks: be careful not to get caught up in a frenzy of market sentiment that is too bullish. No stock goes straight up. For investors looking to invest in this sector, technology stocks with the potential to grow their business over the long term are key, not just the company with a large amount of market sentiment buzz.
Chart courtesy of www.StockCharts.com
What is obvious from this chart is that anytime Facebook shares have moved up, large sellers have emerged. Will the next time be any different? Of course, no one can predict that, but I would caution investors from rushing into technology stocks simply because they appear “cheap.” Market sentiment does shift a lot, and I do like taking advantage of imbalances; but I would want to see a real business model from Facebook that can sustain the current valuation before investing. If it can’t monetize the mobile segment, there are many other technology stocks that can. Just be careful not to get caught up in huge shifts of market sentiment, and look at the business from a logical and unemotional perspective. Technology stocks do have a huge future ahead; I’m just not sure I want to bet on Facebook at this point.