It is now reported that (1) a retail broker was added as an underwriter for Facebook, (2) Facebook's valuation is rich compared to Google.
When you see an issue like this, you can expect that the shorts will be drooling at the high valuation and public excitement because this creates a chance that the stock is overvalued.
You can expect the bulls and the bears to fight it out in the media with arguments and counter-arguments being leaked to reports and bloggers.
The underwriters have given the stock a high price based on the demand. Comparing Facebook to Google, using market cap and revenues, Facebook comes up short on value. You should always do a comparison table of new issues vs. outstanding companies if you are going to trade.
So far, we would expect the stock to trade at a premium and then as the flippers sell, the shorts may move in for the kill. We do not see institutional buying at higher prices. We do see those who bought privately taking a profit to escape the risk and weak holders buying in the aftermarket.
We expect it will trade more like Zynga which settled into the hands of a relatively few large institutions and had a huge short interest. The shorts won in the end.
When you are short a new issue, you are not looking for the company to go broke -- after all, they just won a ton of cash. Rather you want it to duck below the issue price and then if all goes well, when the lock up period ends you will see a further decline you can cover on. The insiders who sell after the lock up paid little or nothing for their stock in most cases and the price they are getting even after a decline is a big payday.
If we were trading this, and we are not, we would be looking for price spike creating a short opportunity. This is not investment advice here folks, this is how a market maker might look at the market.
Will Facebook make a long term run up? Who knows, that is for the analysts to predict.
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