6th UPDATE: Facebook Falls Below $38/Share IPO Price And $100 Billion Value
05/21/2012| 02:21pm US/Eastern
--Facebook shares fall below IPO price of $38
--Company's market cap falls below $100 billion
--Facebook's slide weighs on other Internet stocks
(Updates stock quotes.)
By Drew FitzGerald and Matt Jarzemsky
Facebook Inc.'s (FB) shares fell as much as 13.7% Monday and went below the initial public offering price of $38 on just its second day of trading, a black eye for all those involved with the social networking company going public.
Facebook shares recently trimmed some of their losses but were still down 8.7% at $34.90 on the day, in brisk trading. Based on that price, the company is now valued at $95.63 billion, below the $104 billion it was worth at the time of the IPO. Facebook shares need to hit $36.50 for the market cap to go above $100 billion again.
Falling below the offer price so quickly is considered disappointing for a new stock, especially in the case of the most heavily traded IPO of all time. The reasons cited for the decline include an overly aggressive IPO price, the increased number of shares offered and concerns about Facebook's slowing revenue growth.
"The underwriters completely screwed this up," said Michael Pachter, analyst at Wedbush Securities. "This thing should have been half as big as it was, and it would have closed at $45." The stock fell as low as $33 Monday, and the weak debut also is weighing on other Internet stocks.
A spokesman for Morgan Stanley (>> Morgan Stanley), the IPO's lead underwriter, didn't immediately respond to a request for comment.
While investor enthusiasm was high for Facebook shares, the company's more than $100 billion valuation troubled some analysts.
"Facebook's IPO priced at a level well-above where we foresaw compelling 12-month returns," BTIG analyst Richard Greenfield said in a research note Monday. With revenue and earnings growth decelerating in 2012, "we find Facebook's current valuation unappealing."
The drop Monday has dealt Facebook Chairman and Chief Executive Mark Zuckerberg about $2.2 billion of paper losses, though his stake was still worth more than $17 billion Monday morning. The social network's founder also retains almost 56% of Facebook's voting power.
The slump is likely to turn up the heat on Facebook to boost its performance by generating more revenue from its massive user base, which includes more than 900 million active users. The company's latest first-quarter earnings slipped 12% amid surging expenses.
Revenue actually slipped compared with the fourth quarter, a decline the company blamed on "seasonal trends" in the advertising business and growth in markets where Facebook generates less revenue per user, according to a regulatory filing last month.
Rob Enderle, a principal analyst at San Jose Calif.-based Enderle Group, said Facebook's earnings and revenue don't justify the high price of its stock.
"The insiders made a ton of cash, but the investors who are probably Facebook users lost a lot of money, and it's going to affect their impression of the company," he said. Enderle added that he targets a "conservative" price between $18 and $20 based on the company's earnings and risk.
On Friday, Facebook's shares repeatedly tested the $38 level, but Morgan Stanley reportedly moved to prop up Facebook's stock Friday. Dave Lutz, managing director at Stifel Nicolaus, said Facebook's underwriters might have stopped supporting the stock's price to thwart short-term traders counting on the underwriters buying at $38.
"We think this could just be a technique of Morgan Stanley trying to shake out some of the weaker hands," Lutz said. "What a lot of people will do [when the underwriters continue to step in] is say, 'If the underwriter's not going to let it break through, I'll just sit there and day trade right in front of it.'"
"In theory, [letting the price fall below $38] is a smart idea as long as there's not broader institutional selling," Lutz said. "Where Facebook closes today is going to be very important."
Facebook's weak debut is setting the tone for the whole market. "We're all watching Facebook," Lutz said. "That's going to take the wind out of the broader market, and you're going to have all the Internet stocks selling off."
The disappointing IPO also has dragged down other newly issued online stocks Friday, such as Zynga Inc. (ZNGA), LinkedIn Corp. (>> Linkedin Corporation) and Groupon Inc. (>> Groupon Inc).
On Monday, Zynga fell 1.5% to $7.05, LinkedIn declined 1.4% to $97.65 and Groupon slipped 5.4% to $12.21.
Also, GSV Capital Corp. (>> GSV Capital Corp), a Woodside, Calif.-based fund that invests in venture-backed private companies, posted big declines. GSV has invested in Facebook, Groupon and Zynga, as well as the social-networking company Twitter Inc. GSV fell 7.6% to $12.15.
Many not participating in Facebook's IPO are relieved to be on the sidelines.
"From my standpoint, I'm very happy not to be involved," said Adam Sarhan, head of New York-based fund Sarhan Capital. "There's a lot of hype and hysteria revolving around Facebook."
-By Drew FitzGerald and Matt Jarzemsky, Dow Jones Newswires; 212-416-2909; Andrew.FitzGerald@dowjones.com