Facebook falls flat in market debut

After opening at $42.05, the stock sees a volatile day of trading and closes just above the $38 IPO price. Shares of Zynga drop so sharply that trading is halted.

By Kim Peterson May 18, 2012 7:48AM
Credit: © David Paul Morris/Bloomberg via Getty Images
Caption: Facebook Inc. signageUpdated 4:51 p.m. ET

Facebook
(FB) had a rough introduction to the market Friday.

The stock saw a quick burst in early trading, opening at $42.05, but within 20 minutes dropped back to its IPO price of $38 a share. The debut was surprisingly disappointing, given all the excitement around the IPO.

Things never really got much better. The stock later recovered slightly to more than $41, but lost steam in late trading and ended at $38.23 on trading volume of 566 million. That still placed the company's value higher than those of McDonald's (MCD), Citigroup (C) and Amazon (AMZN).

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With all the hype around this IPO -- and all the talk of excitement at the retail-investor level -- who would have imagined that Facebook's underwriters would be fighting to stabilize shares at $38 heading into the close? But that's exactly what seemed to happen Friday afternoon, when investors appeared keen to dump the stock before the weekend break.

One of Facebook's largest customers, Zynga (ZNGA), saw shares plunge so sharply that trading was halted twice. Zynga shares fell by more than 13% in trading to close at $7.16. Other social-media stocks also sold off. Yelp (YELP) closed down more than 12% to $18.64, Groupon (GRPN) dropped nearly 7% to $11.58 and LinkedIn (LNKD) fell more than 5% to $99.02.

Facebook's stock price and valuation have been hotly debated for weeks. Some investors were thrilled to get into the stock at just about any price. The brand is obviously well known, with more than 900 million people actively using the site worldwide.

Investors like to buy what they know, and brokers reported intense interest in the IPO at the retail level.

But critics say the "dumb money" is pouncing on the IPO while smarter investors take a wait-and-see approach. Some investors say there were too many red flags surrounding the company. Its fast-growing mobile side isn't making money, for example, and Facebook has zero presence in China, the world's biggest Internet market.

One of the biggest red flags: Facebook has shortened its so-called lockup period so that a flood of new shares could hit the market in just three months. The number of Facebook shares that trade could jump to 1 billion, Jim Jubak notes.

Facebook got hit with its first "sell" rating on Friday. Analysts at Pivotal Research Group, which made the call, set a $30 target price on the stock. "We are wary of the disconnect between revenue growth and operating/capital expense growth expectations," Pivotal analyst Brian Wieser said in a research note, according to Reuters. "The market is pricing Facebook as a less risky asset than Google, which we believe is simply not the case."

Market watchers anticipated that Facebook shares would pop on the first day. After all, most IPOs are priced precisely to generate a first-day surge -- and underwriters have tools at their disposal to keep a stock in positive territory. You want a stock to rise early to reflect healthy investor demand. When a stock falls on its first day -- which happened to Zynga in December -- it can be branded a flop.

Expectations were so high for Facebook, in fact, that one analyst said a first-day pop of less than 50% would be a disappointment. "I think anything over 50% will be considered a successful offering. Anything under that would be underwhelming," Morningstar analyst Jim Krapfel told Reuters. "A lot of retail investors are not concerned about valuation. That's what is going to drive the first-day pop."

Facebook has been compared more favorably with Google (GOOG), which was priced at $85 a share in 2004 and ended its first day at $100. The stock took off like a rocket after that and now trades above $600. Is Facebook the next Google? It's a question that nags even the most skeptical investors.

Unlike some other recent tech IPOs -- I'm looking at you, Groupon (GRPN) -- Facebook is profitable. It earned $1 billion in profit last year, in fact, which means Facebook was priced at 100 times trailing earnings. Compare that with Google's trailing P/E of 23.5. Apple's (AAPL) is a little less than 13.

Facebook hasn't given profit forecasts, but one analyst, Ken Sena at Evercore Partners, estimates the company could earn $4.5 billion in 2014, DealBook reports.

Facebook is clearly benefiting from a flood of investor enthusiasm. The company previously priced its IPO at between $28 and $35 a share but upped the range Tuesday to between $34 and $38. It also expanded the number of IPO shares to 421.2 million from 337.4 million.

The company raised $16 billion Thursday for itself and its early investors. It was the third-largest IPO in U.S. history, behind the $19.7 billion raised by Visa (V) in 2008 and the $18.1 billion raised by General Motors (GM) in 2010.

The $38 IPO price puts CEO Mark Zuckerberg's worth at about $19.1 billion on paper. Other large Facebook shareholders are also raking in the dough. Dustin Moskovitz, who helped Zuckerberg start the company, is worth nearly $5.1 billion. Another founder, Eduardo Saverin -- whose relocation to tax-friendly Singapore stirred controversy -- is likely worth about $1.4 billion.

Facebook's rank-and-file employees were expected to clean up as well. If you believe this calculation from 2010 on Quora, the average Facebook employee has nearly 34,000 shares -- which amounts to almost $1.3 million at the IPO price.

Several hundred employees celebrated all night long Thursday, participating in a companywide "hackathon" and staying awake until Zuckerberg rang the opening bell for the Nasdaq from Facebook's offices in Menlo Park, Calif. Employees were said to be drinking Red Bull and spinning tunes in the section of the company's headquarters known as Hackers Square, DealBook reports.

Friday is just the coming-out party for Facebook. The real test of the stock will come over the next year, after Facebook's lockup period expires and the company offers up a few quarters of earnings reports. Facebook is the star of the market now, but can it continue to meet the very high expectations of its investors?

More on Facebook's IPO
411Comments
May 18, 2012 10:24AM
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Before you plop down your $38 for a piece of FB ask yourself a few simple questions.

1. What does this comapny actually produce? (It is not Microsoft or Apple)

2. Where does a value of $108 Billion come from? (FB has nowhere near that in tangible assets like realestate or inventory)

3. When the fickle consumer takes to a new idea what will FB have to keep it afloat? (K-mart &Sears had land, stores, and inventory to take to the bankruptcy court to restructure with)

4. How many things have I wasted $ on in the past that sit in the garage and never get used?

5. Will I be embarassed to put my shares of FB in my yard sale for a dime when everybody knows that I paid $38.00 for them?

 

Looks like smoke and mirrors to me

May 18, 2012 11:08AM
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I had a jelly donut for breakfast    O shoot this isn't facebook
May 18, 2012 4:21PM
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Now, that I am done laughing my a** off. I do not own shares in Facecrook. I will never own shares in Facecrook. I do not have a Facecrook account. I will never own a Facecrook account. My children will never have a Facecrook account for as long as they live under my roof. It is a useless tool, created by a liar and a theif. It is not a safe place for my personal information. It does not have a clear and concise revenue stream. It represents the current moral decay of our society. I do not care if you like Farmville or play Mafia Wars. This whole package has been over-hype by "tween-agers" and young adults with too much time on their hands. This is why China is kicking our collective asses. The same people that post their dull and inane personal information on Facebook and Tweet what they had for lunch are the same idiots that watch the Kardashians and keep them on the air earning millions of dollars. I hate anyone the uses Facebook. Feel free to copy this and post on Facebook....jackas*!
May 18, 2012 11:49AM
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Hilarious, they are trading stock in something totally pretend. Nothing about Facebook is tangible. Its like buying stock in air, dumb. Facebook doesn't make hardware, just extreme time wasting software. Everybody delete your account, gtfo this thing. It logs everything you click, do and say. THEN turns around and gives it to marketing companys so they can feed you bs specificlly.
May 18, 2012 10:29AM
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I canceled/closed my facebook account last September.  Too much drama (with some things)  and while I want to hear how my friends are doing I am not interested in what you are eating for supper.  As one poster said already and I believe they are correct, sooner or later you will have to have a facebook account online to do anything.  It is getting close to that now and while I have nothng to hide I don't want the government and others in my business.    I wish everyone good luck who invests but even if I had the money I wouldn't buy it. I don't trust Wal street or banks anymore they are one of the major reasons the economy is in trouble now.  Give me a good ole Credit Union any day.
May 18, 2012 8:17AM
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Mark Z is a D Bag.  He is going to take your money and run.  Facebook is a useless TIMESUCK! 

 

I predict a mass exodus of users once the marketing begins.

May 18, 2012 1:44PM
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I just closed my FB account today.  I'm not looking forward to more advertising and it's not "fun".  People post offensive material and have no restraint, some people post way too much information and assume you should be way more interested in their life than your own, 

It got to the point of just plain boredom.  They keep changing the layout, games take too long to load, people get upset when they are unfriended to the point where people have killed each other.  I'm thinking if you aren't friends in real life you probably shouldn't be friends on FB.  Plus don't you actually spend real time with your real life friends?  Who needs FB anyway?

May 18, 2012 7:27PM
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Amazing, only in the USA is a company that employees 1000 people i.e. FACEBOOK worth more than a company that employees 200,000 people i.e. GENERAL MOTORS.  No wonder we are in a downward spiral.
May 18, 2012 11:48AM
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No wonder banks loose billions of customers money.

Who the hell is going to buy stock on a company made of smoke like Facebook.

I never used Facebook and I never will, it is all crap..

May 18, 2012 6:50PM
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One year ago, I maybe would of bought the stock? Two years ago, probably. Three years ago, definitely!!! Today, no way! FB is on the decline and is about to tank like Myspace did!!
May 18, 2012 12:13PM
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Another pyramid scam. FB has no assets. Worth no more than the print on the paper.

The people at the top get rich. They paid for the art work in their leased building with stock, that artist is one of the few lucky ones.  Don't buy it America. 

 

Invest in American corporations that produce something and create jobs.

May 18, 2012 9:46AM
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There's an old joke about a barrel of fish that changes hands again and again at ever-higher prices until a buyer finally pries open the lid and finds that the fish are all rotten. When he complains, the seller gives him an incredulous look and says, "Those aren't eating fish. Those are trading fish."
May 18, 2012 11:42AM
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I say everyone should cancel their accounts.  This guy is denouncing his US citizenship to evade paying taxes on the millions he has made.  People gripe about Mit Romeny having his money overseas, yet he did pay the taxes he owed, but this guy made all his money here in the US and now he wants people to buy shares so he can make even more and then he leaving the country so he doesn't have to pay taxes.  I am no Obama fan and will not vote for him , but I can understand what he means by the rich are not paying their fair share and leaving the middle and low class to pay it all.  Really, how many Hollywwod stars have recently been exposed for not paying taxes and yet everyone continues to support these idiots who are taking from the not so wealthy.  I am cancelling my facebook account. 
May 18, 2012 6:19PM
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WHAT DOES FACEBOOK REALLY HAVE TO OFFER THE PEOPLE OF THIS COUNTRY?
May 18, 2012 11:52AM
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GM and SMART organizations are pulling their ad commitments from this company! It is a scam!
May 18, 2012 10:19AM
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Here's the long and short of it:

Facebook is nothing more than a glorified e-mail/instant messaging program.

May 18, 2012 3:44PM
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Not nearly as disappointing a someone telling another on Facebook or Twitter what they had for lunch like it was crucial to the continued existence of the universe.

 

Never seen such a crock in the past 12 years since the bubble.  Stock price at 100 times book value and almost no earnings? Fodder for fools only.

May 18, 2012 4:39PM
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Facebook is maxed out and has no further potential which explains its turn to last resort for profit, STUCK market.
May 18, 2012 4:43PM
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Zuckerberg and his pals are the ones making the money... DO NOT buy into this Stock folks...

Dont get fooled

May 18, 2012 10:24AM
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Facebook is getting old now its all about Twitter, Facebook has too much drama for me i cant take it anymore
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