Now that the hype is over and economic realities are setting in, the bloom seems to be off the Facebook IPO rose. How else to explain the fact that shares in the social network giant fell by 11 percent on the second day of trading while the overall Nasdaq index – and other big-name tech stock – went in the other direction?
Shares closed trading at $34.03, down from the initial launch price of $38, bringing the market value of Facebook as a whole down a dramatic $10 billion. Exactly who, or what, is to blame for the drop is the subject of much discussion. According to Doug Kass of Seabreeze Partners Management, it’s the fault of the overall market: “Facebook’s perceived problems are more likely due to market externalities than anything specifically related to [the company]. From my perch, Facebook’s IPO came at a terrible time in which the eurozone showed tremendous strain. Greece, in particular, weighed heavily on the markets and on Facebook.”
That may be true, but those same externalities don’t seem to be affecting other stock in the same manner as Facebook; not only did the Nasdaq close up 2.46 percent with US stocks coming back from their worst week in a year, but Apple stock rose almost 6 percent by the end of the day. Wedbush Securities analyst Michael Pachter had an entirely different culprit in mind, telling reporters “The underwriters completely screwed this up,” and suggesting that Facebook’s bankers, Morgan Stanley, should have recommended the release of fewer shares at launch.
The weakness of the stock is causing concern amongst analysts over the strength of future social media IPOs, with Tom Taulli, author of the book High Profit IPO Strategies telling the Wall Street Journal, “If Facebook can’t skyrocket and do well, then what can you expect from anything smaller? …Facebook could be a sign we are reaching a top in social media, and need to go on to something else, like mobile industries.” It’s a feeling echoed by IPODesktop.com president, Francis Gaskins, who claimed that “the retail enthusiasm bubble has been popped. The thrill is gone.”
For now, the question is whether things will get worse for the company as the stock moves toward a week of release. “The truth is that in the hi-tech sector, nobody really knows what the predominant product might be five or ten years from now,” says John Lonski, the chief economist at Moodys Capital Markets Group. “When you start the downward momentum it can be difficult to turn it around unless there is a positive surprise pertaining to the company itself.”
Apparently, that kind of positive surprise will have to be more than just the company’s founder getting married to his longterm girlfriend.
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