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.
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
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
Facebook is free now, but how much longer is that gonna last? I looked at some of the long-range plans, and they are terrifying. It looks like before long, to do anything on the web, you will have to have a Facebook account. It's just going to make it easier for the govt. to snoop around in your affairs. I foresee a day when you will not only have to pay your ISP a fee for accessing the Internet, you will also have to pay Facebook to access any sites that are worth a darn. It's going to be like cable TV for the Internet. You could even be charged by the number of times you visit a page. People will say that won't happen, but it will, and when that day comes, I'm taking my computer outside, dumping a gallon of gasoline on it, and sending it up in a blaze of glory. Think about how many sites require you to have a FB account just to post comments. I see FB as an evil serpent, poised to squeeze the life out of the Internet, and this IPO is going to lead us down the path of total annihilation. Btw, I don't have a FB account and never will.
Only FOOLS who are overcome by their own greed are blind enough to buy into all this
HYPE, and I predict that there are going to be a lot of people who learn a very painful
[and costly] lesson in the coming weeks/months.
It's like when a new model of car hits the market; NEVER buy it as there is an excellent
chance that the first year of that model will have FLAWS and you will take a beating, so
wait until the next year and be smart.
This Facebook is the same thing; it looks GREAT and it will be your ticket to HEAVEN,
but hold on a minute and take a breath - wait a little while and be smart, because this is
a VERY risky investment.
If you want to gamble with your money where "The House" has ALL the advantages
[and odds of winning] GO TO LAS VEGAS.
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The offering could become the second-biggest this year if underwriters exercise an option to buy more shares.
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