"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.
Facebook - A Timeline
Facebook Stock Could Fall Twice as Far Before It Hits Bottom
Oct. 28, 2003: Mark Zuckerberg hacked into restricted areas of Harvard University's computer network to create Facemash, a website that pulled the private dormitory ID photos of students, then asked users to compare the pictures of two random students and chose which one was better looking. For the brief period before university administrators shut it down, it proved quite popular.
January 2004: Zuckerberg began to write the basic software to create a universal Harvard social directory, TheFacebook.
Jan. 11, 2004: Zuckerberg registered thefacebook.com domain. Then, on Feb. 4, TheFacebook launched at Harvard University. Mark Zuckerberg, right, and Dustin Moscovitz, co-founder, left; took a semester off in 2004 to further improve on TheFacebook website.
April 13, 2004: Zuckerberg, Dustin Moskovitz, and Eduardo Saverin formed Thefacebook.com LLC, a partnership.
June 2004: TheFacebook moved it's headquarters to Palo Alto, Calif., and received an investment of $500,000 from Peter Thiel.
June 2004: Thefacebook incorporated into a new company, and Sean Parker, a co-founder of Napster, took the job of president for the growing business.
September 2004: Facebook replaced its "User is..." prompt with a "What's on your mind?" question in the newly designed space for posting and sharing status updates called "The Wall."
September 2004: Harvard students Cameron Winklevoss and Tyler Winklevoss of ConnectU filed a lawsuit against Zuckerberg and other Facebook founders for allegedly stealing their idea for a college social network called HarvardConnection.
July 19, 2005: Then-dominant social networking site MySpace was acquired by News Corp., spurring buzz on the Internet about the possible sale of Facebook to a larger media company.
Aug. 23, 2005: TheFacebook dropped its "The" and became Facebook. Purchase price it paid for the Facebook.com domain name: $200,000.
September 2005: Facebook added networks for high school students. In December 2005, Facebook reached 6 million users.
2005: Artist David Choe began painting murals at the headquarters of Facebook in exchange for company stock. Today, the shares he received are worth an estimated $200 million.
2006: A cash flow statement was leaked showing that Facebook had a net loss of $3.63 million for the 2005 fiscal year.
Sept. 26, 2006: Facebook removed its restrictions and allowed anyone 13 and older with a valid email address to join. A news feed and a mini-feed were introduced, providing easier ways to see what your friends are up to.
May 2007: Facebook Platform launched with 65 developers and more than 85 applications. Third-party developers quickly followed, building applications to integrate with Facebook. Games such as Farmville and Mafia Wars spread rapidly.
July 25, 2007: A federal judge gave twin brothers Cameron (left) and Tyler Winklevoss, founders of ConnectU, and Divya Narendra until Aug. 8 to flesh out the allegations in their lawsuit against Mark Zuckerberg. Those charges included fraud, copyright infringement and misappropriation of trade secrets.
December 2007: Facebook reached 58 million users. With the successful addition of Facebook Platform and video, growth remained strong. Facebook charted a course toward becoming a general portal like AOL; meanwhile, the choice was made not to aim toward being acquired, as MySpace.com, YouTube and so many other tech startups were.
June 2008: Facebook settled two lawsuits, ConnectU vs Facebook, Mark Zuckerberg et al. and intellectual property theft, Wayne Chang et al., over The Winklevoss Chang Group's Social Butterfly project. The settlements effectively had Facebook acquire ConnectU for $20 million in cash and Facebook shares valued at $45 million, based on a $15 billion company valuation.
July 2008: The first Facebook iPhone app was released.
August 2008: News broke that some employees reportedly privately sold their shares to venture capital firms at prices that gave the company an implied valuation of between $3.75 billion and $5 billion.
October 2008: Facebook set up its international headquarters in Dublin, Ireland.
February 2009: The "Like" social plug-in was added, allowing users to follow status conversations without having to say anything. The like button was instantaneously a hit. It's initial purpose has been widely misinterpreted as a positive approval button.
August 2009: Facebook acquired FriendFeed, a real-time news aggregator.
September 2009: Facebook said that its cash flow had turned positive for the first time.
April 2010: Facebook announced the acquisition of photo-sharing service Divvyshot, and introduced Community Pages.
May 31, 2010: Quit Facebook Day was an online event where users vowed that they would quit the social network shortly after widespread criticism was received on the new privacy controls rolled out in mid-May. Zuckerberg publicly admitted the company had "missed the mark." An estimated 33,000 users quit the site.
June 2010: Facebook employees sold some shares on SecondMarket at prices giving the company an implied valuation of $11.5 billion
August 2010: Places launched, allowing users to share information about where they are in the real world, so friends can find each other.
Oct. 1, 2010:The Social Network, a film about the start of Facebook, was released to theaters. The film, directed by David Fincher, was met with widespread critical acclaim and won the Golden Globe and Critics Choice Best Picture for the Year. Mark Zuckerberg stated that the film is an inaccurate account of what happened.
November 2010: Facebook added features to its mobile software for Android devices. The number of users reached just short of 608 million, with mobile traffic increasing.
December 2010: TIME magazine named Facebook founder and CEO Mark Zuckerberg the 2010 TIME Person of the Year.
January 2011: Equity investors put $500 million into Facebook for 1% of the company, placing its implied value at $50 billion.
February 2011: Facebook added 'Civil Union,' and 'Domestic Partnership' to its Relationship Status options.
February 2011: Facebook application and content aggregator Pixable estimated that Facebook would host 100 billion photos by summer 2011.
June 2011: Facebook partnered with Skype to add video calling as well as a new group chat feature.
September 2011: Heroku joined forces with Facebook for application development using the Facebook Platform.
Sept. 22, 2011: Facebook debuted the new Timeline user interface at the F8 Convention.
October 10, 2011: Facebook launched its iPad app.
December 2011: Membership reached 845 million users.
December 2, 2011: New York Mayor Michael Bloomberg (left) Facebook Chief Operating Officer Sheryl Sandberg (center) and Sen. Charles Schumer (D-N.Y.), react during a news conference on the announcement that New York will be the center of Facebook's new engineering technology initiative.
December 22, 2011: Facebook launched the new profile user interface, Facebook Timeline.
January 24, 2012: Facebook announced that "Timeline" would become mandatory for all users.
Feb. 1, 2012: Facebook filed paperwork to go public, seeking to raise $5 billion on Wall Street in the largest flotation ever by an Internet company.
March 6, 2012: Facebook launches Messenger for Windows, which gives users of Windows 7 Facebook services without the need for a web browser.
April 9, 2012: Facebook announced that is will acquire the photo-sharing app Instagram for $1 billion USD.
May 18, 2012: Facebook founder, Chairman and CEO Mark Zuckerberg, center, rings the opening bell of the Nasdaq stock market from Facebook headquarters in Menlo Park, Calif. The social media company priced its IPO on Thursday at $38 per share, and beginning Friday regular investors will have a chance to buy shares.
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.
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.