Facebook's stock plunged Monday in its second day of trading, ending more than 10 percent below Friday's IPO price.
Even as true believers argued that the social network's stock is still a bargain in the long run, Monday's stumble -- added to reports of an outside review into how the Nasdaq exchange handled the initial public offering -- fueled critics who say the decade's most anticipated IPO was botched.
Facebook shares, priced at $38 apiece for the IPO, gained just 23 cents in Friday's debut. Things quickly got worse Monday, when the stock closed at $34.03 and continued to slide in after-hours trading.
Reports were rampant that the only reason the company didn't finish Friday's trading below its offering price was that the banks that underwrote the IPO spent hundreds of millions of dollars buying up the stock. Experts had openly wondered whether the underwriters could afford to keep that up. Apparently, they couldn't -- or chose not to -- and as a result, Monday's trading knocked billions off the company's record-setting initial valuation of $104 billion.
Further confounding those bullish on Facebook stock was Wall Street's overall strength Monday: All three major U.S. stock indexes rose at least 1.1 percent, led by the tech-heavy Nasdaq composite index at 2.5 percent. Other social media stocks were mixed Monday after steep falls at the end of last week. LinkedIn, Yelp and Zynga all plunged for the third consecutive day early in Monday's session, though Yelp bounced back.
Too much stock sold?
Founded in a Harvard dorm room in 2004, Facebook has grown to 900 million users in just eight years. Its IPO raked in $16 billion for the company and some early investors.
But many analysts and investors are concerned Facebook's popularity may not lead to robust revenues, especially as the company has struggled to make money from mobile devices, which a growing share of its customers use.
The Nasdaq glitch, which the exchange says occurred when a flurry of last-minute change orders led to millions of Friday morning trades being delayed by nearly 20 minutes, also may have drained enthusiasm from the IPO. The Nasdaq is reportedly setting aside $13 million to resolve those trades, and the Financial Industry Regulatory Authority, or FINRA, is stepping in to oversee that process, sources confirmed to this newspaper.
Experts also argued whether Facebook had sapped its share price by selling too much stock -- or whether that was a deliberate choice.
"The underwriters overestimated demand. They simply tried to sell more shares than the market was interested in buying," said Michael Pachter, an analyst with Wedbush Securities.
Bill Gurley, a venture capitalist at Benchmark Partners in Menlo Park, countered that by putting a larger percentage of its shares on the market than LinkedIn and Groupon did in their IPOs, Facebook ensured a more stable share price -- even though that robbed the stock of a first-day "pop."
"If you're running a company, would you rather have your company trade with high volatility or low volatility?" Gurley asked.
Despite his frustration with the underwriters, Pachter predicts Facebook will outperform expectations and thinks it's worth $44 a share.
That sentiment is far from universal.
Sam Hamadeh, CEO of New York financial analysis firm PrivCo, says Facebook's IPO was overpriced, given that the company was valued at 19 times its projected 2012 revenue of $5.4 billion. Last year, the company had $3.7 billion in sales.
Hamadeh has a "sell" rating on the stock and believes it's worth no more than $25 a share. And he noted that Monday's trading flurry -- more than 167 million Facebook shares traded hands -- means it may be hard for the underwriters to move an additional 63 million shares in an "over-allotment" that had been anticipated to raise an extra $2.4 billion.
Growth is critical
Hamadeh and others say lead underwriter Morgan Stanley may have lost hundreds of millions of dollars on the IPO. The investment bank Friday was buying "literally a million shares a second at $38 per share" to keep the price from sliding lower, Hamadeh said.
Morgan Stanley will receive about $67 million in IPO fees, according to regulatory filings. A spokesman for the firm did not reply to an email seeking comment.
Joe Spiegel, a fund manager with Dalek Capital, said Facebook "fundamentally is wonderful," with a massive and loyal following. But, he cautions, CEO Mark Zuckerberg must show investors he can sustain its growth, either by continuing to add users or coming up with new ways to derive revenue from existing ones.
"Facebook could easily put a company like Evite out of business with an invitations feature," Spiegel said by way of example. "The sheer number of users on the site is only part of the equation."
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