Tuesday, May 22, 2012

Facebook stock falls to $34 on second day of trading; pundits quick to criticize

Facebook stock falls to $34 on second day of trading; pundits quick to criticize:
As many expected, Facebook’s stock fell below its offer price today, settling at $34.33 when the market closed.
Some pundits have rushed to call the social network’s initial public offering a flop, but it is important to distinguish between what a successful offering would be for Facebook versus what the media and some investors might have wanted to see. It is fairly common for stocks to fall below their offer price within the first six months after an IPO. The lower stock price does indicate that the market finds Facebook overvalued in the near term, though its future potential could be much higher.
As Fortune senior editor Dan Primack and Trinity Ventures partner Daniel Scholnick have written, Facebook’s was a highly successful IPO in that the social network likely maximized how much money it raised in the offering. Without a first day “pop,” Facebook can feel confident that $38 was the right IPO price. Had the stock gone way up, the company and investors who sold shares in the offering would have missed an opportunity to make more. Some aggressive investors might be disappointed that the stock didn’t pop on Friday and that it fell today, but that doesn’t change the outcome of the IPO for Facebook, which raised $16 billion in the offering.
Further, the IPO generated so much demand, the Nasdaq faced a number of technical issues that could result in $13 million in compensation for bad trades, according to the Wall Street Journal. On Friday, trading was delayed about 30 minutes and throughout the day investors faced issues that prevented them from confirming their trades of the social network’s stock. Nasdaq executives say the exchange will use $10 million of its own proceeds from the IPO in addition to a standing $3 million cap on payouts to customers who suffer losses as a result of failures in the exchange’s systems. It’s possible that those technical issues led some investors to sour on the stock.
Now, without underwriters to prop up the stock as they did on Friday, the market is determining an appropriate price for the social network. Business Insider editor and CEO Henry Blodget writes that the IPO price valued Facebook at about 65 times its 2013 estimated earnings per share. Apple, on the other hand, is trading at only 10 times its estimated earnings per share. Google is trading at 12 times its estimated EPS. That’s not to say Facebook isn’t likely to one day be worth much more than it is today, but it’s difficult for the market to uphold a $100 billion valuation for a company with $3.71 billion in revenue and $1 billion in profit last year, especially when its margins seem to be declining.
As Facebook continues to grow, its operating costs are going to increase and its stock is likely to fluctuate, but Benchmark Capital partner Bill Gurley points to Amazon as an example Facebook might follow. The Internet company saw its stock linger below its $18 IPO price for almost two months before really picking up. Fifteen years later, the e-commerce company is trading around $218 per share.


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