Facebook skidded 11% lower on Monday, its second day as a publicly traded stock, capping one of the worst market debuts ever. Let’s hope that Mark Zuckerberg and his new bride Priscilla Chan aren’t as star-crossed as the $16 billion Facebook initial public offering.
Facebook launched its stock amid a unique blend of media hype and hatred. When it registered with regulators in February to sell shares to the public, the company was declared by some an instant blue chip, while others forsaw a deal so overpriced that only fools would buy.
But even with such a schizophrenic welcome, no one expected the series of mishaps that has marked Facebook’s IPO. Here’s a look at the contributing factors:
1) Bad news heading into the deal. GM announced it was pulling $10 million worth of advertising from Facebook during the company’s roadshow, when institutional investors meet management and decide whether they want to invest. The money wasn’t significant in terms of Facebook’s more than $3 billion in advertising revenue. But it was symbolic. Investors are very worried about whether Facebook will be able to attract enough advertising to justify the stock’s offering price. The worry: If GM was pulling its ads because they weren’t effective, others might follow suit.
2) The mobile question. Facebook also announced earlier this month that mobile users — nearly half of its 901 million users and the fastest growing part of the business — weren’t generating revenue yet. Everyone knew this, but seeing it in black and white was jarring, especially after the company reported that revenues had slipped between the December and March quarters.
3) The Nasdaq belly-flop. The Nasdaq OMX very loudly rehearsed its Facebook trading prowess the week before the IPO but when the moment came, the systems stalled. The stock opening on Friday was half an hour later than planned and chaotic. Investors big and small didn’t know whether they had bought or sold shares. One major investor said he didn’t find out the fate of a buy order that he had cancelled until Saturday morning. The unwanted buy order went through. Even clients of Morgan Stanley, the lead underwriter, got caught in the confusion. Some didn’t know the status of their orders when the market opened Monday morning. The Wall Street Journal is reporting that Nasdaq is setting aside $13 million to make good on trades that weren’t completed properly.
Nasdaq later blamed the messy open on an onslaught of order cancellations, which New York Times columnist Floyd Norris says came from high-frequency traders, infamous for throwing in orders that they cancel milliseconds later.
4) Facebook and the underwriters misjudged demand. This is where the art of underwriting comes in — especially on a hot deal like Facebook. With demand outpacing supply in many hot IPOs , institutional investors tend to “pad” their orders so they can be sure to get as much as they want. And, indeed, many professional investors have told me that they got only a small fraction of their orders. But some may have gotten more than they expected — in part because the underwriters raised the number of shares Facebook would be selling by 25% late in the game.
They also raised the price range on the deal to $34-$38 from $28-$34 — and then priced the IPO at $38. Many institutions wanted to be in on the deal, even if it was pricey, because there isn’t a very big menu of social media companies to invest in. LinkedIn, the “other” social media company to go public in the past year, was only $353 million in size, a fraction of the Facebook deal. If you are a believer in social media, Facebook is a must-have stock — but only up to a point. Morgan Stanley and Facebook simply pushed too far — and come away with black eyes for it.
5) The market buzz suddenly went silent. According to one trader, word in Frankfurt overnight was that the opening trade for Facebook would be $50. Then in New York that was ratcheted back to $45. The first trade was $42 and in no time the stock was trading at $38. Morgan Stanley and the group of 11 underwriters stepped in to support the price at $38 on Friday. But by Monday, they had stepped away and let the chips fall where they would.
6) The broader market was in bad shape. When Facebook first filed its IPO plan, the markets were sunny and serene. By now, turmoil in Greece is roiling the markets. Facebook went public in the middle of a market decline that saw the Nasdaq close lower for six consecutive sessions.
7) Buyers showed up, but the sellers shouted louder. The most famous buyer to announce himself was Michael Arrington, the founder of Tech Crunch and Crunch Fund. He stated quite simply on his Twitterfeed that he had bought ” a small amount” of Facebook for his personal account at $33.73 a share — a price that values the company at about $94 billion.
But many analysts continued to hammer away at the stock. Pivotal Research Group officially called the stock a “sell” and gave it a valuation of $30 per share. Former high tech analyst and Business Insider publisher Henry Blodget said the fair value was $18 to $24. This may be where a real conversation begins on the stock’s true worth. For months now the battle has been between “realists” who cackle at a company with less than $4 billion in revenues earning a stock market valuation of $100 billion, and the “dreamers” who argue the company will be earning money in ways we haven’t even envisioned yet.