Truck and Barter: Google IPO

June 04, 2004

Google IPO

By Bob

A CBS MarketWatch article points out the weariness that fund managers have about the Google IPO. Much of it sounds like snivelling that they have lost their advantage over retail investors:

They don't like the sounds of getting in at a price they can't make money off of. They fear the price they'd be receiving isn't much of a discount than what retail buyers would get.
It's akin to bypassing the high mark-ups you'd get from Pottery Barn, Saks or any retail outlet for that matter. Where's the value for such middlemen retailers? If Google were a new brand of wildly popular jeans sold at the same price to both consumers and retailers, then retailers might opt to buy cheaper imitations or jean jackets they can offload to consumers at higher prices.

In like vein, fund managers are finding alternative investments to play the positive sentiment surrounding the IPO.

To be sure, some fund managers expect the Google IPO to be the top of the Internet market. They'd look to short most Net shares. But I would argue that Google planned its IPO well.

I would say that Google planned its IPO well to extract as much money out of the market as possible. Initial trading of the stock is likely to be down which is contrary to how most internet stocks traded in the late nineties. The reason is simple; who is left to buy at that price? If the hesitency of fund managers to participate is widespread, it is conceivable that it may open lower than expected and institutions may jump in at that point. I think that's unlikely to happen and that individuals are likely to bid up the IPO price. There is something in the market called 'natural selling' which means that there is always somebody out there holding a stock who needs to paint the garage or pay for their daughters wedding. This phenomenom is why in slow markets, it seams stocks like to drift down. I find this much more common in smaller stocks who don't have much coverage. So, if you're planning to participate, I recommend a low ball bid.

Posted at June 4, 2004 06:42 AM

Comments

I agree that Google stock will probably fall after the IPO, but I don't think natural selling has anything to do with it. There really won't be any natural sellers, because any public investors would have just bought in on the IPO - if they needed the capital they likely wouldn't have gone in on the IPO in the first place. Further, company insiders who might want to capitalize on the IPO must, by law, wait 6 months before they can sell their stock from the IPO. The price of a stock during the first few weeks after an IPO is almost exclusively driven by speculation. Without the big institutions hyping the stock, it is likely Google stock will be much more easily manipulated by short-term speculation.

Comment by Jason at June 5, 2004 12:09 PM | Permalink

Let me continue the guessing game. There are two types of purchasers--investors and speculators. If we can argue that the market will bid the price down, which idiots are the ones buying so high? Those looking for long-term invesments should be the ones buying high and early. But if investors expect speculators to knock the price down, they'd wait to invest. Which means the short-termers don't knock the non-existent price down. Catch 22...

I agree with Jason, and personally don't think garage painters will have any effect on the IPO. If people need to paint their garage, they will not bother planning to deal with the Google auction at all...

Comment by Kevin Brancato at June 6, 2004 09:04 AM | Permalink

Jason, Kevin,

I think you both underestimate people's short-term thinking. The most likely people selling on the open will be short sellers and don't say you can't because it does go on(I've done it). There are ways around such restrictions which aren't available to your avaerage retail investor. Eventually, what will drive it down is people realizing they have a loss. The last IPO that I remember where people said it will be owned by long-term investors was Pixar, that stock cracked within a day or two. Granted, this isn't the best comparison since people had a huge gain on the open for that one.

Wouldn't it be funny if through all this talk, the stock rallied? I wonder what P/E the market will give it, probably 60 to 80 or at least trade there for a while. It maybe a buy if it opens at 40(P/E that is).

Comment by Bob at June 7, 2004 01:58 PM | Permalink