The value of shares… What do they reflect?
The biggest news in the investing world currently is Facebook. Mark Zuckerberg (CEO) founded the idea eight years ago and this empire is soon to be floated. Mr Zuckerberg was proposing a valuation of Facebook at $100 billion. However, Facebook’s privately traded shares have apparently risen 10 percent since the social networking company filed for an IPO. According to SharesPost Inc, this percentage increase has pushed the potential market value past the $100bn mark. So where has this 10 percent increase come from?
Facebook have not produced any ‘good’ news or bad news; yet have experienced a positive share price movement. Normally this would be accountable to an information leak, however my personal opinion is that Facebook shares are increasing in the hope that they will be a sought-after commodity once the company is floated.
Does this show stock market inefficiency? Well no not really. The shares have yet to be floated on the stock market, so surely it cannot be compared to that theory. What does this increase in share price show? Lets take a similar situation. Back in 2004, Google Inc. went public and issued shares. Since then the share price has increase eight-fold. With this as Facebook’s nearest comparable, investors must be hoping for a similar highly profitable story with the ever-growing social network company.
Will this increase hold out? This depends on the amount of shares issued by Facebook themselves. The final amount of shares to be issued is still yet to be confirmed, but information has estimated it to be around the 2.33 billion. However, if the number reduces, this could cause the share price to increase due to a diluted amount of shares available. On the other hand, a saturation of shares could reduce the share price.
What would Warren Buffett do? The self made billionaire has made is fortune by investing when no one else dares. I think Facebook is not even in his peripherals due to the sheer media coverage and minimal potential returns. Undervalued shares are what Mr Buffett is on the prowl for in the investing world.
Undervalued shares… how does this come to be? Well, an example is that of the merge between Xstrata and Glencore. The newly merged firm would be worth $90bn, with Xstrata accounting for $39bn (BBC Business New, 2012). However, two of Xstrata’s major shareholders are voicing that they believe this undervalues their shares. The valuation of Xstrata therefore does not adequately reflect the share price warranted by these two major shareholders.
Do you think facebook isn't showing normal 'efficient' stock market practices (shareprice moving up and down due to news releases)because it hasn't released its shares yet and all shares are privately owned? What about after they release their shares, do you think the share price will continue to increase like googles eight fold? Do you think it has the same potential as google or do you think it has more?
ReplyDeleteDue to Facebook's shares not yet being public, I do believe that this is the reason for the adverse trend. I believe that people are getting a little to excited with the shares, valuation, potential of Facebook. One part of me believes that Facebook is going to be a flop. It almost seems like it has been rushed, even though I am sure that sponsers, analysist etc have thoroughly planned the IPO down to a T. With the IPO making alot of Facebook employee's 'Paper Millionaires', will this result in Facebook becoming inefficient? It could well do, with employees more excited to spend their new found fortune rather than the key and specific job within the Facebook corporation. However, on the other hand, I can not come up with a major weakness or threat. Facebook have relatively low fixed costs, compared to vast amounts of revenue, thus making it an extemeley profitable business. I can see Facebook's shares increase a considerable amount, however I would not invest, just down to a gut feeling that is telling me something just isn't right.
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