Even after Friday's mayhem and Monday's fog, the stock continued to fall through Tuesday. So you can't blame glitches for all of Facebook's slide ... which could always rebound by, say, tomorrow. Stocks do that.
This brings us to the snitch. Here's what we think we know so far, based on reporting by the New York Times, Reuters, and Business Insider.
In the run-up to Friday's IPO, Morgan Stanley's lead consumer Internet analyst cut revenue forecasts for the company. JPMorgan Chase and Goldman Sachs, two other major underwriters, followed. That takes us one step closer to solving the mystery of Facebook's falling stock price: Three huge banks changed their mind about Facebook's immediate future and told institutional investors to back off the stock around $40.
The logical follow-up question is why did all three lead underwriters take the extraordinary step -- one mutual funder: "I've
never seen that before in 10 years" -- of cutting their Facebook forecast? One clue might be in Facebook's S-1, which it updated on May 9 (9 days before the IPO).
Based upon our experience in the second quarter of 2012 to
date, the trend we saw in the first quarter of DAUs increasing more
rapidly than the increase in number of ads delivered has continued. We
believe this trend is driven in part by increased usage of Facebook on
mobile devices where we have only recently begun showing an immaterial
number of sponsored stories in News Feed, and in part due to certain
pages having fewer ads per page as a result of product decisions. [my emphasis]
That first sentence is troublesome. Really simply, it says that users are still rising faster than ad revenue, because Facebook is still struggling to figure out how to make money off its contintent-sized audience. But is the sentence really so shocking that the banks would take the nearly unprecedented step of spooking their investors days before an IPO that they were underwriting? Perhaps not.
That's where the snitch theory comes in. Henry Blodget reports that analysts cut their estimates because Facebook told them to -- exclusively. (Not illegal, perhaps. But not cool, either.) "Put differently, the company basically pre-announced that its second
quarter would fall short of analysts' estimates. But it only told the
underwriter analysts ... not to smaller investors," Blodget writes. Whether it's illegal, extralegal, or just grossly unfair to average investors, we'll let the SEC decide.
The unfairness principle doesn't begin and end with the snitch, John Cassidy argues. It begins with the secondary market, where big investors gobbled up bits of Facebook for cheap and watched their shares bloom before the company went public. Since Friday, the stock has traded sideways, and then down.
The big idea here is that companies are staying private longer, which allows them to soak up up millions and for the market value to top out, leaving little on the table for average investors.* So-called "D-rounds" of late-stage stock offerings are now common for tech companies who'd like the benefits of wide-scale funding without the drawbacks of public disclosure rules. "More to the point," Cassidy says, "they allow hot companies to bid up the price of their stocks well
before the investing public gets a sniff." By the time the public gets a sniff, the smart money has already cashed out.