"How much money did you lose in the Facebook (FB) IPO?"
It seems like an enormous number of investors are asking each other that question lately.
Yet, so far, estimates of how much money was lost in Facebook's IPO fiasco are mostly a matter of guesswork.
Based on a Bloomberg estimate that 25% of the company's IPO shares were set aside for -- and bought by -- Main Street investors, and given that the stock was down $7.80 a share on Tuesday from its offering price, it works out to about $820 million in losses to mom-and-pop investors across the country. That may significantly understate the damage, though, as day-trading investors may have bought and sold the stock multiple times over the course of the past few days, losing money all along the way.
And that's the good news. Now here's the bad: Whatever the right number is for how much we've lost so far ... get ready to double it.
Puts and Warrants and Tigers, Oh My!
That's the upshot of a new Bloomberg story late last week, which highlights a frightening trend among international investors: They're betting against Facebook. And they're betting big.
Here in the U.S., market data cruncher Data Explorers reports that the cost to short-sell Facebook has surged to a 10 on the company's 10-point scale. This suggests that professional "shorts" are so certain Facebook will fall further that they're willing to pay almost any price for a chance to bet against the stock.
Meanwhile, similar bets against Facebook are currently "the most actively traded structured products tied to Facebook since its IPO." Over in Europe, bankers at UBS (UBS), Commerzbank, and Julius Baer have traded hundreds of put warrants (contracts that entitle their owner to force a counterparty to buy a stock) over the past few days. Tied to tens of thousands of Facebook shares, these warrants (what we would call "options" here in the U.S.) are betting that the shares could fall as low as $22.
Bets that Facebook will go down, one market watcher notes, are now running more than 2-to-1 over bets that it will go up.
Are You Scared Yet?
If you own Facebook shares today, this has to be worrisome. While technically Facebook went public at an IPO price of $38, the fact is that most investors didn't get a chance to buy the shares until they began trading on the Nasdaq at an opening price of $42. Now we're hearing that some of the savviest investors from around the globe are betting the stock will fall to barely half that price.
But here's the thing ... they could be wrong. They could all be wrong.
Remember, even the scandalous reports that Facebook's IPO underwriters withheld information about slowing ad growth at the company aren't as frightening as we've been led to believe. At Morgan Stanley, for example, they were only enough to subtract about $0.03 per share from fiscal 2012 profit estimates, and only a nickel from 2013. Facebook's lead underwriter still thinks the company will earn at least $0.83 per share next year.
This suggests that the shares today cost about 36 times forward earnings, which may not be overpriced after all, if the company succeeds in hitting (or exceeding?) the 36% long-term growth rate that Wall Street has set for it.
What if the worst does happen, if the skeptics are proved right, and Facebook does fall to $22 or below? Even here, the news isn't all bad.
Facebook earned $1 billion last year. Morgan Stanley's new earnings estimate suggests the company could net more than $1.7 billion in 2013 -- 70% growth over just two years' time -- leaving it still a fabulously profitable company by any measure.
Even better, a $22 share price would mean that new investors (or old investors not too embarrassed to double down on an initially unsuccessful investment) could soon get a chance to own Facebook at just 26.5 times earnings.
When you get right down to it, maybe we should be hoping the shorts are right about Facebook after all.
Motley Fool contributor Rich Smith holds no position in any company mentioned.