The historic initial public offering (IPO) of Facebook Inc did not go as planned on Friday, as the social networking company’s sky-high valuation combined with trading glitches left the stock languishing near its offering price at the market close.
Facebook shares began trading late on Friday morning and opened 11 percent above the US$38 offering price, but after peaking at about US$45 slid rapidly at the end of the day to close at US$38.23.
The IPO was the third-largest in US history and valued eight-year-old Facebook at US$104 billion. The surprisingly weak debut of a stock that analysts had predicted would climb between 10 and 50 percent is not likely to dent the business prospects of Facebook, which boasts 900 million users and is upending business practices and social relationships around the world.
However, the unexpected developments were a clear setback for Morgan Stanley, the lead underwriter on the deal, which sources said was forced to defend the US$38 price level by buying shares on the open market. Many market participants said they expected the stock to stay under pressure next week.
The offering also proved an embarrassment for the NASDAQ: The opening was delayed as the exchange struggled with a huge volume of orders, and for much of the day there were long delays in order confirmation. The SEC said late on Friday that it was reviewing the situation.
Social media companies and Internet companies that had hoped to benefit from a Facebook halo effect were instead dragged down, with social gaming giant Zynga dropping almost 15 percent.
Analysts said Facebook may simply have over-reached in raising the IPO price range, pricing at the top of the range and increasing the size of the offering earlier in the week.
“The underwriters got greedy on behalf of selling shareholders and bumped the price high enough that they didn’t get much of a bump on the first day,” said Bill Smead, chief investment officer at Smead Capital Management, which did not buy Facebook shares in the IPO. “They increased the size of the deal and that really did a number on it.”
Skeptics have argued all along that a valuation of more than US$100 billion — about equivalent to Amazon.com Inc and exceeding that of Hewlett-Packard Co and Dell Inc combined — was far too high for a company that posted US$1 billion in profit and US$3.7 billion in revenue last year.
Concerns about Facebook’s earnings potential were highlighted by General Motors’ announcement this week that it would no longer buy paid advertising on Facebook.
“You don’t need more than a small pencil and napkin to do a valuation on this, to say there are heroic assumptions in earnings growth to keep this at US$100 billion, much less US$115 billion or US$120 billion,” said Dave Rolfe, fund manager at River Park Wedgewood Fund, which does not own shares in Facebook.
“I know there’s a lot of excitement and exuberance, but it seemed today that the market is starting to do some hard valuation math early on,” he added.
Facebook’s opening day on Wall Street does not bode well for the stock’s performance in the days ahead, said Channing Smith, portfolio manager at Capital Advisors Growth, which also does not own shares in Facebook.
“If you’re an investment banker or if you’re long the stock, I would definitely be a bit worried as we walk away to the weekend,” he said.
The weak IPO may also give pause to private investors in Silicon Valley who have been pouring money into next-generation Internet companies at very high valuations in the hope of eventually taking them public.