By Tom Bradley

I find the kerfuffle about the Facebook initial public offering (IPO) interesting. I don’t know if anything nefarious went on behind the scenes, but it seems to me that what played out on this overhyped and highly priced IPO (the $38 issue price equates to over 20x revenue) fell within the range of possible outcomes.

Facebook is impossible to value at this point in its development. It’s already one of the most important web platforms (along with Google, Apple and Amazon) and it certainly has a shot at becoming a highly profitable company (as the others did), but it’s still a bit of a crap shoot. Ultimately the stock price will be determined by how well the company monetizes (makes profits from) its user base. In the meantime, because Facebook’s valuation is so far out of the normal range, the stock will ebb and flow with every new analyst report, privacy abuse and Zuckerberg sighting.

Clearly the company and large shareholders got greedy in pricing and sizing the issue. Employees and other early shareholders sold over $9 billion of stock to the public, while only $6.8 billion was put into the company’s coffers. But should the buyers of Facebook shares, on the IPO or in the market afterwards, be surprised that Wall Street is hyperventilating (it was before the issue, why not after) and media sentiment is swinging like a baby on a Jolly Jumper? Certainly the sophisticated institutional buyers shouldn’t be. They read every page of the prospectus and knew the risks. Individual investors bought through full service advisors, so presumably their Facebook shares were put in the ‘high growth / high risk’ bucket of their portfolios.

I’m not trying to make light of investors’ short-term paper losses, but the result here was well within the realm of possibility. New issues aren’t a one-way street. They don’t all go to massive premiums on the first day of trading. Indeed, the fact that some do, like LinkedIn and Groupon, just reinforces how imprecise the IPO process is.