Facebook’s IPO Flop

Shares of Facebok continue to slide over 2% in trading on Tuesday following Facebook’s disappointing IPO last Friday that witnessed a sell-off following an initial spike in delayed trading.

The selloff continued Monday as Facebook’s shares dropped 10% from $38 and closed at $ 34.

When Facebook was priced at its Nasdaq IPO price of $38.00 a share last Friday, it was valued at 100 billion and priced to perfection at a level that was higher than 99% of the companies on the S&P 500 with a price to earnings ratio near 100 compared to other tech companies like Apple and Google which had PE ratios in the low teens.

Priced at $34 a share, Facebook has a price-to-earnings ratio of about 85 times projected earnings for the next 12 months, according to CapitalIQ

Many investors have been blaming Facebook’s main underwriter, Morgan Stanley, for overpricing Facebook’s IPO which allowed Facebook insiders and private equity investors to sell their shares at a high premium but left Facebook investors with losses. 

Morgan Stanley was the lead underwriter among the 33 firms Facebook hired to manage the sale of its stock and reportedly had to defend Facebook’s IPO stock price of IPO during the selloff on Friday by purchasing large numbers of Facebook shares.

Increasing the number of shares

Days before the IPO, Facebook increased the volume of shares being sold by 25 percent to 421.2 million while raising its asking price $38 from the lower range of $28 to $35.

During Facebook’s IPO, retail demand was high at 25% but after technical difficulties became known with the NASDAQ’S computer system, many investors were unable to execute trades and decided to not get involved with Facebook’s IPO.

Alistair Barr  is reporting that Facebook’s lead underwriters, Morgan Stanley, JP Morgan, and Goldman Sachs all lowered their earnings forecasts for the company in the middle of the IPO roadshow which may have lowered the demand for Facebook’s shares.

Many investors have been questioning Facebook’s business model which just saw quarterly net income slide 12 percent to $205 million, from the previous quarter which saw $233 million.

Facebook must also be prepared to handle an industry wide shift to mobile advertising, a sector which it primary rival Google with its Android operating system, is a dominant player.

 

 

 

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