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Tuesday, May 22, 2012

Facebook Stocks Didn't Jump As High As Expected

Story first appeared in USA Today.
Facebook didn't make too many friends Friday.

After jumping 18% in early trading upon its much-hyped initial public offering, its gains quickly evaporated.
By day's end, shares of the world's largest social networking company finished at $38.23, barely above its $38 offering price. (In aftermarkets trading, shares were trending higher).

Facebook raised about $16 billion through the sale, which gave the company a maket value of about $104 billion. But its lackluster public debut deflated the pre-IPO hype that had floated in the business press and on Wall Street for weeks. Many market prognosticators had expected Facebook shares to surge Friday. But after an early pop to $45, it was mostly downhill.

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. 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. 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.

The drop in price doesn't mean there was a lack of trading. By day's end, nearly 480 million shares traded, a record for a first-day offering.

Before the stock opened, 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. Marketplaces and other broker/dealers experienced severe slowness, and unfortunately, those issues impacted customers.

Given the size and complexity of the offering, the number of investors involved, the early glitch and trading delays were not surprising.

When you have an IPO with this kind of huge spotlight shining on it, you want it to come off clean. 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.
Despite the barely-above-the-IPO close, Facebook enriched scores of employees, including the hoodie-wearing founder and CEO, who sold 30 million shares worth more than $1.1 billion. He 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.

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. 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, investors 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.

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