The idea of a stock offering is that investors can provide the money a business needs to get started (or perhaps to get started on something new, like a new factory). The investors, in turn, own shares of stock with the possibility of being rewarded, particularly if the company and its stock goes up in value.
The Facebook IPO (initial public offering of stock) turns all that on its head. This IPO comes not at the start of the business, but long after, after the peak of its public relevance has already passed and not long before its peak in revenue.
Buying in at the top, stockholders stand little chance of gaining any reward. Quite possibly, the opening day of trading will stand forever as the peak of the company’s stock market value. At its peak the stock traded for nearly 100 times earnings, which simply means that if the company is able to continue its current pattern of operations, it could eventually earn enough to pay back its stockholders, but that would take 100 years to do.
Try to picture Facebook 100 years from now, in 2112. It is a ludicrous suggestion, particularly when you look at the trajectories of prior companies that succeeded in similar ways, most notably MySpace, but also AOL and CompuServe. Given that historical context, it is hard enough to picture Facebook ten years from now, in 2022. Realistically, Facebook faces a short window of opportunity, and its total future earnings will be a small fraction of its current stock market value.
And so this is essentially it. Last week’s IPO accounts for most of the money Facebook stands to get in its entire history. In financial terms, its stockholders are essentially donors, putting money into the hat to thank the company (and those who provided its previous financing) for a job well done. There is fundamentally nothing wrong with that, but for such a transaction to pass as an IPO shows that several things have gone very wrong along the way.