IP-uh-Oh: Investor Lessons from Facebook Going Public – part 3

Learning Objectives – Facebook IPO:

  • Stock prices reflect expectations about the future
  • What a company says they’re going to do or not do can impact what people expect
  • Quarterly earnings reports allow a company to disclose its activities and its financial situation

Introduction

This past month, Facebook released their first ever earnings report as a publicly traded company.  The incredible hype and energy around this company’s IPO has now given way to the more sobering work of scrutinizing the company’s operations and ability to make money. If you’ve been following the first two parts of our IP-Uh-Oh series, you’ll recall that part 1 talked about investments being driven by beliefs and part 2 focused on why companies ‘go public’.  In this last part, we look at the point in time when all the ‘guesses’ get put to the test and a company has to report its earnings to its shareholders.

In its short life as a public company, Facebook’s timeline might resemble that erratic but popular friend we all know on Facebook. It would start with pictures of a seemingly epic party that they managed to get invited to and would somehow give way to status updates about lawsuits suggesting that something at the party has gone horribly wrong. Of course, being the internet, there are countless ways in which the unflattering pictures of the post party hangover have been passed around.  Ironically, the company that was built on “shares, is now more responsible for tending to shares of a different variety. Unfortunately for those holding shares, the market seems to have responded less enthusiastically than many had hoped (as of the writing of this article they’re down over 43% year to date).

Given that stock prices are perpetually forward-looking, however, what a company says (or doesn’t say) about its future opportunities is what investors look to for help in deciding whether to stay the course or to get off the boat.

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