After Market Price of Facebook and Weibo IPOs - Essay Example

After Market Price The initial public offers (IPOs) are first given to the investors in the primary market. An underwriter oversees the initial transaction of the IPO to the primary market. In the case of Facebook, the underwriter was JP Morgan Bank (NASDAQ, 2017). The underwriter is also responsible for the valuation of the initial public offers (IPOs). The primary investors are then allowed to sell their stocks to the secondary market such as NYSE, after a lock-up period. It is notable that the company only floats 20% of their shares to the market. The lock-up period is meant to help the company IPOs to stabilize (NASDAQ, 2017). In most cases, the IPOs lock up period is 90 to 180 days. The majestic fall of the Facebook IPOs and the significance drop in its revenue attracted a Senate investigation to establish whether there was collusion among the insiders in the valuation of the IPOs. The paper will evaluate the after-market price of the Facebook and Weibo IPOs and identify any evidence of underpricing or overpricing of the stocks. Facebook Measurement of possible overpricing or under-pricing of the Facebook IPOs in 2012. One major way of evaluating evidence of the over-pricing and under-pricing is the market adjusted returns (MAR). On the day 0 when the Facebook shares were introduced to the market the value was $ 38.23 (NASDAQ, 2017). The MAR was measured at 0.014 indicating an overpriced share. In the first week of trading, the stock closed the day at 33.03. At the end of the lock-up period, the value of the shares fell to $ 18, signifying the flooding of the market by the initial investors. Data shows that from the first day of the trading the MAR value declined from 0.014 to -0.392 by the December 2012 (NASDAQ, 2017). The fact that the value of the stock dipped on the second day of trading from 0.014 to -0.113 is indicative of a stock that was overpriced. Weibo Weibo could be termed as the Facebook and Twitter hybrid in the Chinese market. The company controls at least 30% of the market users in China. The Weibo IPOs were introduced in the market in April 2014. The offer price was $ 17. The MAR value at the day o of trading was calculated at 0.1890. In the first week of trading, the stock gained and closed the week at $ 19.21, though the midweek gain had Weibo trading at 23.15 (NASDAQ, 2017). In the first week of trading, the MAR value of the Weibo IPOs remained above zero signifying the stock was underpriced. Notably, under-pricing favors the primary investor who can accumulate by acquiring at a low price and flood them after the lock-up period when they have gained in value. The value of Buy and Hold Period returns (BHR) was measured above 0 in the first, second week of trading signifying a form of underpriced shares. Actual Events of how Market Changes Come About A company says Facebook or Weibo only floated 20% of its share in the IPO (NASDAQ, 2017). The majority of the shares, 80% remains with the investors in the primary market. Investors in the main market are assured of some level of return whether the stock has gained in MAR or not. After the lock-up time, the primary investor floods the market with shares. The basic principles of demand and supply stipulate that price will fall when supply is high (NASDAQ, 2017). However, after the stocks from the primary market have been absorbed, the value of the stock may stabilize due to the balance between supply and demand. If the demand remains high, the value of the stock will keep rising as the case with Facebook whose shares had risen from lows of $ 22 in 2012 to the high of $ 121 in 2016 (NASDAQ, 2017). Notably, the demand for Weibo shares dipped following flooding of the market by first investors. Consequently, the value of the stock went from high of $ 22 to the low of $ 12 in 2012 (NASDAQ, 2017). Factors that caused Mispricing at Facebook and Weibo An overpriced stock is just overvalued, in other words, it is given at a higher price than its real or actual market value. The actual market value is the price at which the stock is listed in the exchange market such as NYSE. An under-priced stock is the opposite of the overpricing. Empirical evidence suggests that the value of the Facebook shares were undoubtedly overpriced. It is important to analyze the factors that caused the overpricing of the stock. Three factors are usually implicated in the event of mispriced shares. The first factor is the relative valuation, which is measured by price-to-earnings ratio (P/E) (NASDAQ, 2017). The method relies on the earnings of a company in a year to determine the actual values of its stock. The method relies on the future earnings of the company, not the previous earnings. Notably, it is possible to predict the earnings of the company by looking at the past balance sheets of the enterprise. Another aspect of the relative valuation is the price-to-book (p/b). The ratio looks at the revenues generated from the assessment of the company book value. Intrinsic value is another factor that contributes to the mispricing of stocks (NASDAQ, 2017). The method assumes that an actual stock value is determined by the fundamental financial data and zero speculation regarding future earnings of the company. The investors accept that in the long-term, the value of a stock tends to shift towards the intrinsic value. However, fluctuations in price and demand may cause temporarily pricing of stock above or below the intrinsic value. Intrinsic value relies on financial data in determining the value of the stock (NASDAQ, 2017). The last factor that could contribute to mispricing of the stock is technical analysis. For example, some investors' failure to analyze the underlying business of a given stock and instead look at the behavior of the market participants to determine the value of the stock. The technical analysis evaluates the trading volume and price charts of the other participants to determine the value of stock. In conclusion, the value of the Facebook IPOs was overpriced due to the market adjusted returns (MAR) and the BHR being below zero. On the other hand, the value of Weibo was under-priced because the MAR value at day t of trading remained above zero. In addition, excess Buy & Hold Period Returns (ABHR) stayed above zero in the first week of trading. Reference NASDAQ, 2017. US Market stock. Retrieved from: http://www.nasdaq.com/ Read More