Facebook IPO falls short of the hype

There wasn’t much to like about Facebook’s first day as a public company.

The social media giant’s stock rose by mere pennies in its initial public offering. The shares closed at $38.23, barely above the $38 IPO price.

The performance fell far short of the grandiose expectations of Wall Street and Silicon Valley, and raised questions about whether the company’s stock will be the sure bet many had counted on.

“There was all this pressure and hype and attention with all eyes on Facebook — and the starlet tripped on the red carpet,” said Max Wolff, an analyst at GreenCrest Capital Management in New York.

What went wrong? Analysts point to a variety of factors that might have given investors pause. Its valuation at about 100 times earnings likely struck some as too high. Its growth in new users is slowing. And Facebook has not yet found a way to cash in on mobile devices, where social media is gravitating.

This week’s decision by General Motors Co. to stop advertising on Facebook because it wasn’t getting results heightened concerns about how Facebook can profit from its 900 million users.

But perhaps the biggest blunders came in recent days as the company and its largest shareholders moved to maximize their profits at the expense of new investors.

On Monday, Facebook raised the stock’s projected price to a range of $34 to $38 from the initial $28 to $35, and priced it at the peak of $38 on Thursday. That made Facebook far more expensive than established competitors such as Apple Inc. and Google Inc. based on the companies’ earnings.

On Wednesday, the company announced that longtime investors led by Goldman Sachs planned to sell big chunks of their holdings in the IPO. That struck some investors as greedy and a sign that Wall Street insiders were getting out while they could.

“There was a lot of smart money dumping it,” said Barry Ritholtz, chief executive of research firm Fusion IQ.

That added to fears among professionals and individuals who were burned by the late-1990s dot-com boom and subsequent stock-market crash.

“Investors have a won’t-get-fooled-again attitude in the sense they have learned their lesson after the dot-com crash and 10 years later they are more discerning,” said Anthony Valencia, a media analyst at TCW Group. “Now it’s more of a show-me attitude.”

Facebook also was a victim of heightened expectations stirred by its own success. The IPO raised $16 billion, making it the third-largest in U.S. history. It valued the entire company at $104 billion, the largest ever for a newly public company.

But Facebook failed to notch the sizable first-day gains that had become de rigueur for scores of previous big-name companies. Google jumped 18% on its first day in 2004 and professional networking company LinkedIn Corp. surged 49% a year ago.

Facebook’s disappointing entrance sent a tremor through the broader technology industry, which had hoped to capitalize on the excitement generated by the public fascination with social media.

Other social media stocks got walloped, with daily deals site Groupon Inc. slipping 7% and Zynga Inc. falling 13%.

The day began before dawn at Facebook’s Menlo Park, Calif., headquarters, where about 2,000 Facebook workers gathered at the campus preparing for the company’s debut on the Nasdaq exchange. A catering team handed out breakfast sandwiches to fuel the troops. Many had been up all night in a pre-IPO hackathon.

TV trucks swarmed the campus and two helicopters circled overhead.

About five minutes before the stock officially started trading at about 8:30 a.m PST, Facebook Chief Operating Officer Sheryl Sandberg and Chief Executive Mark Zuckerberg, in his trademark dark gray hoodie and jeans, addressed the crowd. The company’s senior leaders and others who worked on the IPO joined Zuckerberg and Sandberg on an outdoor stage, as did Nasdaq Chief Executive Robert Greifeld.

After a countdown of “five, four, three, two, one,” Zuckerberg hit the opening “bell,” to hoots of approval across the crowd.

But things went south from there. Just fifteen minutes after the stock began trading, brokerages complained that they weren’t getting confirmation that trades were going through. Nasdaq warned that there were glitches in executing trades. Some agitated investors waited more than two hours to learn if their orders went through.

The problems caught the attention of the Securities and Exchange Commission, which said it would launch an investigation of the technical problems to prevent future snafus. The exchange also said it was looking into the matter.

Some analysts said they weren’t surprised to see the stock price end the day about where it began.

“At its current valuation it’s trading approximately 100 times earnings, which is certainly a very rich valuation,” said Michael A. Yoshikami, CEO of Destination Wealth Management. “It will be interesting to see what happens in the future for social media companies, particularly considering Zynga’s drop today in response to the Facebook offering. In particular, advertising, which has been slowly decelerating in terms of growth, will likely be under pressure in the future, particularly considering General Motors’ recent decision to cease advertising on Facebook.”

Individual investors who bought the stock said they were drawn by the long-term prospects of the social-media wunderkind rather than fleeting day-to-day gyrations in the stock.

“If you’re buying Facebook for the short term, you’re in a lot of trouble,” said Roger Wilkerson, 49, who runs a Los Angeles tutoring company and bought 100 shares at $40.25. “You’ll need to call your therapist a lot. But five years down the road, it’s going to be a phenomenal price.”

Vanessa Bedard, 25, was also betting on the long haul. The Studio City social media consultant bought 100 shares for $40.60 each — mainly for the novelty.

“It’s a smart investment based on their continued growth,” she said. “There’s endless revenue opportunities and they’ve only scratched the surface. I’m pretty optimistic.”

But other small investors didn’t want anything to do with the stock out of fear that the hype is greater than the potential.

“Oh god, no — I never buy into hysteria,” said West Hollywood film producer Darren Sherwood, 44. “You’re not going to be a millionaire overnight.”

Hamilton and Hsu reported from Los Angeles. Guynn reported from Menlo Park.

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