Was Facebook stock overhyped?
The company made a big splash in the stock market last week, raising a whopping $16 billion. This week, its share price is already plunging.
However, while the company sold an enormous $16 billion worth of shares, its stock price climbed a puny 23 cents over the course of the trading day, closing at $38.23 a share. And on Monday, the stock plunged by more than 10%, ending at $34.26.
Is Facebook's troubled debut evidence that the company was overhyped?
Yes. Ordinary investors got suckered: Many people had expected Facebook's stock to pop on the first day, but its early struggles suggest that "professional money managers viewed all the hype as just that," says Gretchen Morgenson at The New York Times.
"Indications are that Facebook was bought primarily by individual investors, not institutions," which means that small-time buyers with big-time dreams of getting rich fast were left holding a lot of Facebook stock that no one else wanted to buy. "It's an old line on Wall Street: If you can get your hands on a hot new stock, you probably don't want it."
And clearly, Facebook's business model is flawed: No one is sure that Facebook can make enough money to justify a $100 billion valuation, says The Economist. And some analysts expect the share price to dip as low as $30 "as the euphoria surrounding the world's largest internet IPO fades."
Facebook simply hasn't proven to investors that it can draw in enough advertising revenue, and Zuckerberg and Co. "need to show they can increase revenue fast enough to justify a stock market valuation that is more than 100 times Facebook's 2011 profit."
C'mon. Facebook is doing just fine: "Dismissing the company as hype and the offering as a bust is yet another sign that it is the financial world that's in need of fixing, not Facebook," says Zachary Karabell at The Daily Beast.
With stock markets weighed down by the European debt crisis, and investors "fleeing stocks and anything risky," the fact that Facebook is holding up at all "should be seen as a small victory." Against a background of decline and crisis, we should be celebrating "Facebook's golly-gee optimism" that it can "create a future brighter than many now believe possible."
More from The Week
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All hail the bull market, which ended the week with a big rally. But it also is starting to look a little like 1987, which suffered an epic blow-out.
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