Facebook shares jump, then fade on first day of trading
— -- Facebook didn't make too many friends Friday.
After jumping nearly 15% in early trading of its much-hyped initial public offering, gains quickly evaporated.
By day's end, shares of the world largest social networking company finished at $38.23, barely above its $38 offering price.
Facebook's less-than-stellar debut deflated much of the pre-IPO hype that floated in the business press and on Wall Street for weeks. Many market prognosticators had expected Facebook shares to surge Friday.
Traders and market observers blame the lackluster performance on heavy trading demand that delayed Nasdaq processing market orders and over-optimism by Facebook's investment bankers, who boosted the IPO's size and share price from a range of $28 to $35 a share. Wall Street's continued slump also hurt. Stocks fell for the 12th time in 13 sessions Friday on fears over the slowing global economy and mounting financial woes in Europe.
"Big IPOs and big deals often mark the top of major market moves," says Brian LaRose, a technical market analyst at market adviser United-ICAP. "This is a very big IPO that was well-followed and well-hyped. When you see big investors exit or start to take profits there is a reason to believe that there is substantial downside ahead. Markets are very, very weak and very vulnerable."
That the stock didn't fall below its $38 IPO price suggests that underwriters who brought the deal to market swooped in to buy shares to prop it up, for fear of a public relations disaster, says Gary Kaltbaum, president of financial adviser Kaltbaum Capital Management.
"The investment bankers came in; they had to jump in and buy the stock. They couldn't have such a hyped IPO come down below the offering price," Kaltbaum says.
The drop in price doesn't mean there was a lack of trading. By day's end, more than 458 million shares traded, a record for a first-day offering.
Before the stock opened Friday morning, there were so many last-minute orders at the Nasdaq exchange that trading, expected to start at 11 a.m. ET, was delayed 30 minutes. After popping above $43, it was mostly downhill from there.
Given the size and complexity of the offering, the number of investors involved, the early glitch and trading delays were not surprising, says Bill Christie, a finance professor at Vanderbilt University who has done research on market mechanics.
"When you have an IPO with this kind of huge spotlight shining on it, you want it to come off clean," says Christie. "It might just be frustration in the short run but doesn't do long-term impact to investor sentiment."
Born in a Harvard University dorm room in 2004, Facebook has become part of the social fabric of more than 900 million worldwide users. With a market value of more than $104 billion, the company has a higher valuation than McDonald's, Visa, Cisco Systems and Amazon.com.
Despite the barely-above-the-IPO close, Facebook did raise $16 billion in the IPO, enriching scores of employees, including Mark Zuckerberg, the just-turned 28-year-old CEO who sold 30 million shares worth more than $1.1 billion. Zuckerberg, who rang Nasdaq's opening bell from Facebook headquarters from the company's sprawling headquarters in California, will remain Facebook's largest stakeholder.
Before trading started, people huddled outside the windows of the Nasdaq site in New York's Times Square, waiting for the stock to open. Some held up cellphones and cameras pointed at the Nasdaq board, waiting to get a picture of the first price change.
Facebook's rich valuation comes as it tries to cement its role in the Internet. While Facebook had about $1 billion in earnings last year on revenue of $3.7 billion, the company still has to prove it can find ways to boost profits.
Chris Brown, manager of the Pax World Balanced mutual fund, made a roughly $14 million investment when his $1.9 billion fund acquired private shares of Facebook on a secondary market before the IPO.
Brown said the muted Friday gains, after a great deal anticipation over how much the stock might climb, wasn't a surprise.
"Going into the IPO, there has been a lot of skepticism from investors, in particular institutional investors, questioning anything from whether the price of the stock is fair, to whether Facebook can successfully monetize and sell ads," he said. "We're long-term investors. It's nice to have the stock up for one day, but it's only one day. It's hard to extrapolate much as to the future of the company."
In coming days, Brown expects plenty of ups and downs for the stock, as investors assess a company whose prospects are hard to pin down because of its evolving business model.
"You're going to see obviously an extreme amount of volatility over the next week as people evaluate the stock," Brown said.
Despite widespread pre-IPO enthusiasm, not everyone was on Wall Street was buying in. Lewis Altfest, who runs New York-based financial adviser Altfest Personal Wealth Management, was advising clients not to buy shares, saying they were too pricey. He predicts Facebook shares will trade lower six months from now.
"I'm getting a lot of requests, but I try to discourage them and if (they still want shares) I try to limit the amount of shares they buy," Altfest says. "They just want to be part of this cult thing, and those that think they will be made multi-millionaires are in for a rude awakening."